Regain Stability and Grow Your Business with DIP Financing
Learn about Debtor in Possession Financing and Find the Best DIP Loans for Your Business
DIP financing offers both a secure and unsecured financial opportunity.
Debtor in Possession Financing Facts
The concept of debt financing is similar to what is known as debtor in possession (DIP) financing. Both debt and DIP financing are sometimes intertwined and often interchangeable. Though this depends on where your business stands since DIP financing, our topic refers to a type of loan for a business operating under the Chapter 11 bankruptcy reorganization process.
DIP financing allows the company to retain control of its assets through the restructuring period, making it a valuable financial tool for a business’s operations and its longevity.
The following provides an overview of debtor in possession funding solutions, how businesses may benefit when exploring this type of funding, and how to begin exploring it.
How Debtor in Possession Financing Works
In practice, a business that is going through a Chapter 11 bankruptcy restructuring has access to debt financing, but it may run into pushback from traditional lenders.
DIP financing is more aligned with the business’s status, which makes it a more attractive option for those exploring debt funding solutions.
DIP Financing Availability
Debtor-in-possession financing is only available to those businesses that have filed for Chapter 11 bankruptcy protection.
The application and funding usually will begin at or around the same time as when the company goes into bankruptcy. This provides the business with options that are not dead set on its liquidation.
DIP financing lets a business raise capital to continue operations all-the-while going through the Chapter 11 restructuring process.
The business uses its available assets as collateral for securing DIP funding.
A lender will usually accept the business’s inventory or accounts receivable as part of the DIP collateral. In some cases, a lien may be placed on the business’s commercial property as well, depending on its ownership.
The negotiation process for DIP loans may take a few days or a few weeks. The timeline typically relies on the size of the business and the complexity of their bankruptcy.
The loan may vary based on the operational needs and the capital required to get back on track.
Why Debt Financing Matters
DIP financing can be an important lifeline for any business in Chapter 11 bankruptcy.
DIP financing allows a business to:
- Maintain payroll and pay suppliers
- Stabilize the business’s operations
- Restructure its balance sheet
More About the Importance of Debt Financing
A business in bankruptcy can usually only obtain DIP financing by giving its post-bankruptcy lenders protection in the form of a senior lien position. While a senior lien position guarantees that the lender will be repaid in full even in liquidation, it also limits the business with strict payment terms. This can hinder the reorganization process.
Strict oversight by the bankruptcy court serves as an additional protection to DIP financing lenders to ensure that new credit sources are available to businesses in bankruptcy.
In many cases, sufficient capital dictates whether a company trying to emerge from bankruptcy will succeed or fail. Without funds to cover their operating expenses, companies cannot restructure their debt and execute a reorganization plan.
DIP lenders can be any of the existing lenders for a business or a new lender that wants to participate. They are given a senior lien position that protects their downside risk. They are also protected by the assets of the company, which are pledged as collateral.
The bankruptcy loan can be converted into a long-term credit facility or into equity when the company emerges from bankruptcy
The DIP Financing Process
The funding provided through debtor in possession financing tends to carry higher interest rates because the business is undergoing Chapter 11 bankruptcy and poses a risk of default. The terms and conditions are favorable considering liquidation is the other option.
If everything goes smoothly, the lender gets their payments once the business exits Chapter 11, is restructured, and becomes stable. This can happen as a result of some smart business moves made in part by its owner refinancing debt and liquidating some assets.
Debtor-in-possession financing offers working capital when your business is going through its darkest hours. It offers stability to push through the Chapter 11 bankruptcy and restructuring so you can hopefully come out on top.
About Chapter 11 Bankruptcy and Restructuring
Many businesses will file Chapter 11 bankruptcy this year. Their reasoning for filing varies, but the underlying issue is money. More specifically, the lack of money needed to keep the lights on.
If approved for Chapter 11 bankruptcy, the business will go through a restructuring.
The restructuring includes the organizational structure of its debts and assets. The business continues to operate but creditors often take over its operations until it returns to normalcy.
Downsizing is the typical route one may take when going through Chapter 11 bankruptcy.
- The business may cut staff and liquidate assets
- It may limit or scale back on business operations
- Or, pull back from segments where it was overextended
The goal is not only taking control of the business’s operations but staying in control of it during this restructuring. The original owner gets to decide how to proceed and may bring the business back into fruition before creditors take over.
DIP financing presents one of these options to stay in control and keep the lights on.
An Example of How DIP Financing Works
Under Chapter 11 bankruptcy, a business files for protection from creditors while it reorganizes.
During the reorganization process, the bankruptcy court allows the business to secure additional operational capital from lenders.
Under the jurisdiction of the bankruptcy court, these post-bankruptcy lenders assume a senior position on liens and security interests in the business assets, normally by consent of the pre-bankruptcy senior lenders.
In practice, the continued operation of the business allows the debtor in possession to reorganize, reposition itself, and improve its chances of repaying its debts.
Advantage and Disadvantage of Debtor in Possession Financing
Should you consider debtor in possession funding if your business undergoes Chapter 11 bankruptcy? No doubt, this question weighs on your thoughts when facing Chapter 11.
Here is what your business may experience when exploring DIP financing.
Advantage: Stay in Control
The Chapter 11 restructuring process may strip ownership of the business you built.
DIP financing presents a chance to take control, keeping you on board as the owner versus letting the business’s operations fall into the hands of its creditors.
You may also stay in control of who stays onboard during the inevitable downsizing.
It hurts going through this downsizing process, but you know the team better than anyone else, especially when creditors are only looking at payroll expenses. This could improve your business’s chance of returning to its full operating status.
Disadvantage: A Costly Process
The death spiral of the business may already be locked in.
Chapter 11 bankruptcy and its restructuring and DIP financing may offer a way back, but it is not a sure thing. You are now trying to pay back these new loans, plus other debts while trying to run a struggling business.
You may contemplate whether it is best to shut things down and start a new business versus trying to rescue a business that may already be losing employees and its clients. In all, this usually turns into a costly process that may have initially been best directed elsewhere.
A Tough Decision
It is a tough experience watching your hard work be in the hands of the courts after having filed Chapter 11 bankruptcy. You do have options and how things go moving forward depends on how committed you are to the business.
Why Use Your FundingTree for DIP Financing
Your FundingTree is set up to easily find DIP financing lenders that best align with you and your business’s goals. Our knowledgeable staff are ready to help, and we put years of experience and knowledge into finding your business the ideal financial solution.
Here are some added reasons why you should partner with us:
- Quick, easy, and free application
- Same day funding options available upon approval by a lender
- Access to our team of financial advisors
- Up to five lenders competing for your business
Your FundingTree is the Best Choice for DIP Financing
Your FundingTree is where banks and other DIP lenders compete against each other to earn your business. This means you will be offered some of the best DIP financing interest rates and customer service.
We have been featured by nationwide broadcasters such as ABC, CBS, NBC, and FOX who have recognized us for the services we have provided to businesses in all industries. We currently have an A+ rating with the Better Business Bureau which goes to show how satisfied our customers have been with our services.
How to Apply for Debtor in Possession Financing
Not sure how the application process works with DIP financing?
The following is an overview of what you will experience when working with Your FundingTree:
- Submit an online application to Your FundingTree or speak with one of our financial advisors.
- We will work with lenders within our marketplace to find the best DIP funding options tailored to your business’s needs.
- We will make the introductions and then you can begin working directly with the DIP funding companies.
The process is rather simple and quite smooth once you are working with a great debtor in possession financing company. Your FundingTree makes that a reality.
Financing Success with DIP Financing
It is a tough, uphill battle going through Chapter 11 bankruptcy and the restructuring process.
Not only are you experiencing difficulties in day-to-day operations, but employee morale and business relationships may become strained as well.
- Why should you consider DIP financing and push through potential problems?
- How can you improve your chances of seeing the business return to normal?
- What can you do to springboard from DIP financing into finding new success?
The following offers a little guidance through the process.
Understand Your Benchmarks
Those approving of the DIP financing will set benchmarks for the business owner and its operations. It is important to understand what these are and to create a plan to meet them.
The performance benchmarks may feel (or become) overwhelming.
Ensure you are working with the best talent and seek guidance when there are problems before they become those things that strip you from controlling your business.
Become More Lean and Agile
Chapter 11 bankruptcy carries a restructuring that is bound to shake up the workforce and those higher up in management. This could prove positive if your business is already seeing stagnation or found itself going through bankruptcy because of the bureaucratic process!
In a way, the restructuring and new opportunities delivered through DIP financing could return your business to its original lean and agile operations.
Once DIP loans are paid off, much of the pressure is now off your shoulders — allowing everyone to feel engaged and driven for success.
Debt and DIP Financing Alternatives
Explore the business loan types that align with your company’s financial goals, needs, and purpose.
Your FundingTree offers additional types of business funding and business services to our clients. Get in touch with one of our friendly financial advisors to discuss your business’s needs.
Our 90-Second Debtor in Possession Financing Application
It takes less than 2 minutes to submit a free application for DIP funding
A more profitable, sustainable business begins here!
Our financial advisors use in-house metrics and guidelines to process your application. Your loan application has no obligations, nor does it impact your personal and/or business’s credit score.
The best part? It only takes 90-seconds to submit an online application!
Why waste time sorting through dozens of DIP financing applications? Time is valuable! Your FundingTree makes the loan application as quick and easy as it can get!