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DIP financing in Kentucky explained

On Behalf of | Jul 6, 2022 | Bankruptcy

In the business world, money is king. You need to have a steady cash flow for your company in Kentucky to survive, regardless of your circumstance. But here’s the tricky part: when your business is in debt, it will need even more money to run its daily operation and pay its creditors. However, no one would be readily willing to lend you more cash, given your situation. Here’s where DIP financing comes in.

DIP financing definition

DIP financing, or debtor-in-possession financing, is a type of loan that’s only available to businesses that have filed for commercial bankruptcy. The purpose of DIP financing is to give the company the working capital it needs to keep operating during the bankruptcy process.

How it works

After filing for Chapter 11 bankruptcy, the court will give you up to four months to devise a reorganization plan. This plan is essential because it shows your creditors that your company can still work to generate the money you need to pay them.

Since you are in debt, you will need money to fund your new plan. Therefore, you must request the court to approve your request for more loans. The bankruptcy judge will consider factors such as the value of your collateral, your ability to repay the loan, and the interest rates of other creditors before granting this decision.

If they approve your request, you can start searching for a lender that’s willing to give you DIP financing. These lenders are usually investment banks or commercial finance companies. They will offer you a loan with terms and conditions that are different from traditional loans. For example, they may require you to put up your assets as collateral or give them a higher interest rate.

Benefits of DIP financing

DIP financing allows your business to keep operating during the bankruptcy process. This is important because if your business stops operating, it may be unable to restart again. Also, it gives you time to restructure your business and get it back on track.

DIP financing can be a good option for businesses facing difficult financial times. However, before you choose it, you should be aware of its risks, like the higher interest rates and using more of your company’s assets as collateral.