Businesses experiencing financial difficulties often discover that their new financing sources are shrinking precisely when they need it the most. You may eliminate the opportunity to get further loans from existing lenders. It is also possible for the company to go into default. That is where debtor-in-possession (DIP) finance may be of assistance to the borrower.
A business that applies for Chapter 11 bankruptcy protection may be able to benefit from DIP funding. DIP finance may assist a business in reversing its path, providing it with restructuring assistance, and returning it to profitability.
What Is DIP Financing?
When a company files for Chapter 11 bankruptcy protection from creditors, you may use DIP financing to give additional cash to the business. It is usually made accessible to businesses when lenders think the firm has a realistic possibility of reversing its fortunes and has a solid strategy. It is not accessible to businesses that are merely looking to liquidate their operations. Following the filing of the petition, a post-petition lien is formed.
A debtor in possession refers to when the existing management and board of directors continue to control the company after filing a Chapter 11 bankruptcy petition. Business owners who have declared bankruptcy may not be aware that they may get funding to help them turn their business around after doing so.
A significant number of lenders see DIP financing as an attractive lending opportunity due to the favorable treatment that company bankruptcy loans get under United States bankruptcy law. Under the legislation, you must pay DIP creditors first before any other creditors may get money. Many lenders would commit to a DIP Chapter 11 loan, but they would not commit to a loan obligation to the same firm if the company had not filed for bankruptcy in the first place.
How Does DIP Financing Loan Process Works?
When a lender is found who is prepared to fund the business’s turnaround, the company applies for permission from the Bankruptcy Court to complete the turnaround. A “priority” security interest in the collateral, a market-rate or even premium rate of interest, an authorized budget, and other associated lender safeguards are all standard DIP financing conditions. If creditors believe you will harm them due to the loan, they may object to it.
In the end, it will be the Bankruptcy Court that will determine whether or not to authorize the loan. Suppose a business in Chapter 11 bankruptcy already has secured loans and wishes to borrow money on a secured basis equivalent to or senior to the current debts. In that case, the following are the steps that you must take:
- It will be necessary to get permission from the existing lender(s) to proceed with the new loan.
- To be successful, it must persuade the Bankruptcy Court that the current lender(s) will be adequately safeguarded and that they will not be made worse off due to the additional loan.
Even if a current lender who provided funding to the company before its bankruptcy filing has refused to provide additional advances to the firm before the bankruptcy filing, the lender may be prepared to commit to a DIP business bankruptcy loan after the filing. In addition to the additional protection provided by the Bankruptcy Code, the lender may have its objectives in mind while establishing the DIP loan.
If the Bankruptcy Court accepts a DIP loan and determines that it was issued in good faith, the credit will not be susceptible to a legal challenge and will remain in effect. That is in contrast to the identical loan issued outside of bankruptcy, which might have been susceptible to a legal challenge if you had made it outside of bankruptcy.
How Is Accounts Receivable Factoring Used In DIP Financing?
Factoring may also be used as a financing technique in the context of dip financing by businesses. Obtaining funding and recapitalization via accounts receivable finance during the Chapter 11 bankruptcy process may be one of the most flexible methods. Both the borrowing business and the factoring firm can benefit from factoring. The borrower can get much-needed financing that is not dependent on its credit history, and the factoring company may obtain priority status under the Bankruptcy Code.
If your business is facing financial difficulties, evaluate whether or not you have viable alternatives. You may be able to complete a workout or other restructuring procedure without filing for bankruptcy. However, if you decide that Chapter 11 bankruptcy is the best choice for your firm, DIP finance may provide a compelling chance to assist you in turning your business around.Porter Capital