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What is DIP financing?

On Behalf of | Dec 15, 2021 | Bankruptcy

When a Kentucky business is facing financial difficulties, it may want to continue operating while reorganizing its operations and debt through bankruptcy. If this is the case, it could meanwhile apply for something known as “debtor-in-possession” financing, which, if approved by the bankruptcy court, gives the business a chance to flourish while still protecting them from creditor actions. If you have been thinking about applying for DIP financing for your business, here is what you should know.

What is DIP financing?

Chapter 11 commercial bankruptcy permits a company that is drowning in debt to reorganize rather than liquidate. So, if you choose this bankruptcy option, you also get access to a unique form of lending that you can use to run your business. This lending is what is known as DIP financing.

It is known as debtor-in-possession because the debtor still owns the business, and they have protection while restructuring. With this form of financing, you can still provide your company’s services and goods, and make deals with your suppliers and vendors in confidence even though you have filed for bankruptcy.

How DIP financing works

After you file for Chapter 11 bankruptcy, you can find a lender, then go to the bankruptcy court for approval. If the court approves after examining your financial plan and the type of protection you want, then your financing will be granted. Moreover, the court will also look at your lender’s oversight of that loan, and if they find it reasonable, they will approve it.

The central part of DIP financing is your budget. Before your lender gives you the money and the court approves your financial plan, you must provide them with a forecast of your net cash flow, expenses, outflows, seasonal variations, professional fees, and any other capital outlays from your business. From here, you can discuss the size and structure of the loan you will receive. The lender must also be confident that your reorganization plan will work and bring some degree of profitability to your business.

If you cannot get any private loan or source of financing while bankrupt, the court can step in to authorize a “priming DIP loan.” This type of loan will get you the funding you need, but it gives your creditor the legal right to sell your assets as collateral if you don’t meet your obligations.