Between 2013 and 2017, over 20,000 businesses went bankrupt. The reasons for going under vary, but one thing is for sure: companies need to know what to do when they file under Chapter 11.
That’s exactly what debtor-in-possession financing is for. DIP financing gives your company a source of funding even during bankruptcy.
In this article, we’ll be discussing how DIP financing works and its many benefits. Read on to find out more.
Table of Contents
What is DIP Financing?
DIP financing, or debtor-in-possession financing, is a specialized form of financing for bankrupt companies.
Those that have filed under bankruptcy under Chapter 11 can obtain DIP financing. It gives businesses time to reassess and reorganize their affairs.
This is done by an umbrella of protection afforded by U.S. bankruptcy statutes. DIP financing is different from other types of financing since it has priority over equity, debt, and other claims.
How Does DIP Financing Work?
Financing a company while it’s under bankruptcy is unique, but entirely possible with DIP financing. Here’s how it works.
A lender funds a business against their working capital. That lender then gets the first-priority lien on the bankrupt business for protection.
Once that business is properly refinanced, that lender gets paid earlier than anyone else.
You can also do something similar with asset liquidation. The lender estimates the value of the assets to calculate the loan and structure. This is what’s called “marginalizing” against the business’s assets.
All of this takes place right at the beginning of a company’s bankruptcy. The court approves the financing plan as well as the administration of the loan itself.
Bankrupt companies now have funding to continue their business, but it’s wise to have an exit strategy as well. If you want the nitty-gritty of DIP financing, have a look here.
Benefits of DIP Financing
So why do companies take on DIP financing in the first place?
Other than being able to run a business while you’re bankrupt, there are actually even more tangible benefits. Let’s take a look at a few here:
Builds Road to Financial Health
Companies might fall into bankruptcy due to a variety of reasons. Whether it’s poor capitalization, outgrowth planning, or just unexpected market returns, there are plenty of things businesses often wish they could take back.
DIP financing provides companies with the hindsight to make more sound financial decisions.
Debt Priorities
Priorities change once businesses file under Chapter 11. Those using DIP funding might shift their focus on new debt obligations. This allows businesses to leverage the best possible outcome for their stakeholders.
Time to Reassess
Best of all, debt-in-possession financing gives businesses time. This is time that can be used to reorganize their company structure and make smarter business moves while creating better strategies
Obtain DIP Financing Today
Many companies delay the DIP financing process because they can’t grasp the fact that their company is bankrupt. Resist this urge and get a head start on your DIP strategy.
Use this article when going through the DIP financing process and chart out a better future for your business.
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