{"id":13418,"date":"2023-01-10T11:45:00","date_gmt":"2023-01-10T11:45:00","guid":{"rendered":"https:\/\/businessyield.com\/?p=13418"},"modified":"2023-01-25T10:34:37","modified_gmt":"2023-01-25T10:34:37","slug":"debtor-in-possession-financing","status":"publish","type":"post","link":"https:\/\/businessyield.com\/finance-accounting\/debtor-in-possession-financing\/","title":{"rendered":"Debtor In Possession Financing: How It Works, DIP chapter 11","gt_translate_keys":[{"key":"rendered","format":"text"}]},"content":{"rendered":"\n

What is Debtor-in-Possession Financing (DIP)?<\/h2>\n\n\n\n

Debtor-in-possession financing (DIP) is a special type of financing for companies that are in bankruptcy. Only companies that have filed for Chapter 11 bankruptcy protection can access DIP funding, which is normally provided at the beginning of a filing. <\/p>\n\n\n\n

DIP funding is used to facilitate the reorganization of an owned debtor (the status of a company that has filed for bankruptcy) by allowing you to raise capital to fund your business while your bankruptcy process continues. DIP funding differs from other funding methods<\/a> in that it generally takes precedence over existing debt, capital, and other claims.<\/p>\n\n\n\n

How Debtor-in-Possession Financing (DIP) works<\/h2>\n\n\n\n

As Chapter 11 prefers corporate restructuring over liquidation, filing for protection can be an important lifeline for companies struggling with funding. In debtor-in-possession (DIP) financing, the court must approve the financing plan in line with the protection granted to the company. <\/p>\n\n\n\n

The lender’s oversight of the loan is also subject to judicial approval and protection. If funding is approved, the company will have the liquidity it needs to keep going.<\/p>\n\n\n\n

When a company can get DIP funding, it notifies suppliers, suppliers, and customers that the debtor can stay in business, provide services, and make payments for goods and services during its restructuring. If the lender has found the deal credible after reviewing its finances, it stands to reason that the market will come to the same conclusion.<\/p>\n\n\n\n

Receipt of Debtor in Possession finance (DIP)<\/h2>\n\n\n\n

DIP funding usually comes early in the bankruptcy process, but often companies that may benefit from judicial protection delay filing because they do not accept the reality of their situation. Such indecision and delay can waste valuable time as the DIP funding process is typically lengthy.<\/p>\n\n\n\n

Antiquity<\/h3>\n\n\n\n

Once a company goes into Chapter 11 bankruptcy and finds a willing lender, it must seek bankruptcy court approval. The provision of a bankruptcy law under bankruptcy law provides the lender with the much-needed convenience to fund a business in financial need. <\/p>\n\n\n\n

DIP-funded lenders take precedence over assets in the event of company liquidation, an approved budget, a market-rate or premium, and any additional convenience measures that the court or lender deems to warrant their inclusion. Today’s lenders generally have to agree to the terms, especially if they are backing out on a property lien.<\/p>\n\n\n\n

Approved budget<\/h3>\n\n\n\n

The approved budget is an important aspect of DIP funding. The “DIP Budget” may contain a forecast of the company’s income, expenses, net cash flow, and results for continuous periods of time. You should also consider forecasting the timing of supplier payments, fees, seasonal variations in your income, and capital expenditures. <\/p>\n\n\n\n

Once the DIP budget is agreed upon, both parties will agree on the size and structure of the credit or credit line. This is only part of the negotiation and groundwork required to secure DIP funding.<\/p>\n\n\n\n

Loan Types<\/h3>\n\n\n\n

DIP funding is often provided through fixed-term loans. Such loans are fully funded throughout the bankruptcy process, which means higher interest costs for the borrower. To date, revolving lines of credit have been the most widely used method by which the borrower could withdraw the loan and repay it if necessary like a credit card. This allows for greater flexibility and thus the ability to keep interest costs low as a borrower can actively manage the loan amount borrowed.<\/p>\n\n\n\n

Debtor in possession bank account<\/h2>\n\n\n\n

A US Department of Justice fact sheet states that debtors held in Chapter 11 bankruptcy cases have special obligations regarding bank accounts. You need to:<\/p>\n\n\n\n