Debtor in possession financing (DIP) offers companies both an unsecured and secured financial opportunity. the idea of debt financing is similar to DIP financing.
DIP financing offers both a secure and unsecured financial opportunity. Both DIP and debt financing are sometimes used interchangeably. The difference between these two terms will depend on where your company stands financially.
A company can control its assets through the restructuring period with DIP financing. This makes it a strong financial tool for a company’s operations and its longevity.
Can debtor in possession financing help you? Keep on reading and we will take you through everything that you are going to want to know!
What Is Debtor In Possession Financing?
DIP financing is a special type of financing that is meant for businesses that are currently in bankruptcy. Only businesses that have filed for bankruptcy protection under Chapter 11 are able to utilize this kind of financing. This usually takes place when the process of filing is just beginning.
DIP financing is used to help with the reorganization of a debtor in possession. “Debtor in possession” a business that has filed for bankruptcy. DIP financing means that a debtor in possession can raise capital to fund its operations as its bankruptcy case runs its course.
DIP financing is a unique form of financing.
Understanding DIP Financing
Because corporate reorganization is preferred over liquidation in Chapter 11 bankruptcy cases, filing for protection can provide a distressed company in need of financing with a crucial lifeline. With DIP financing, the court needs to approve a financing plan that is consistent with the protection that is given to the company.
The lender’s oversight of the loan is also subject to the bankruptcy court’s protection and approval. When the financing does get approved, the business is going to have the liquidity that it needs to keep functioning.
When a business is able to secure this type of financing, it lets clients, suppliers, and vendors know that the debtor is going to stay in business. The debtor will make payments for services and products during the reorganization process and will also continue to provide its services.
If the lender sees that the business is credit-worthy after it goes over the company’s finances, then the market should come to the same conclusion.
Obtaining Debtor-in-Possession Financing
DIP financing typically takes place at the start of the bankruptcy filing process. However, what usually happens is struggling businesses will delay filing when they benefit from court protection. This is usually because they are not able to accept the reality of the situation.
This delay and indecision can lead to companies wasting valuable time. This is unfortunate considering that the DIP financing process can take a lot of time.
Seniority
After a company goes into Chapter 11 bankruptcy and they find a lender who will lend to them, the company needs to be approved by a bankruptcy court.
Offering a loan under bankruptcy law means that a lender gets plenty of comforts when they provide loans to a business that is financially troubled. DIP financing lenders get first priority on assets in case the business gets liquidated. They also get first priority on a premium or market interest rate and an authorized budget
Plus, the lender will get any added comfort measures that the bankruptcy court believes should be included. Current lenders typically need to agree with the terms, and they tend to take a back seat when it comes to a lien on assets.
Authorized Budget
An important part of DIP financing is the approved budget. This budget can include a forecast of the business’s net cash flow, expenses, receipts, and outflows for rolling periods.
The budget also needs to consider forecasting the timing of seasonal variations in its receipts, professional fees, and payments to vendors.
After the budget has been agreed to, both parties need to agree on the structure and size of the loan or credit facility. This is just one part of the legwork and negotiations that are needed to achieve DIP financing.
Types of Loans
This type of financing is usually provided through term loans. These are loans that are funded fully during the process of bankruptcy. This means that the borrower will have to bear higher interest costs.
Revolving credit facilities are the most used strategy. This means that a borrower can draw down a loan and then repay it as they need, just like with a credit card.
This process allows for more flexibility. Now, the debtor in possession has the ability to keep interest costs lower because they can actively manage how much the loan actually gets used.
Advantages of a Debtor in Possession (DIP)
The main advantage of being a debtor in possession is that you can continue to run your business. However, you need to run the business in the best interest of the creditors. You also might able to secure DIP financing and keep your business afloat until you can sell it.
The Importance of Knowing About Debtor In Possession Financing
Hopefully, after reading the above article, you now have a better idea of what debtor in possession financing is. As we can see, this can be a great lifesaver for struggling companies. By knowing about your bankruptcy options, you can make the best choices for your business.
Are you looking for other helpful articles like this one? If so, check out the rest of our site today for more!
