DEBTOR-IN-POSSESSION (DIP) FINANCING FOR COMPANIES IN BANKRUPTCY
Can Invoice Factoring get you out of Bankruptcy?
Why Bankers Factoring as Your DIP Financing Lender?
Factoring Options for Bankruptcy Reorganization
DIP Financing Lender for Small Business
Businesses in financial distress find their sources of new funding shrink just when they need cash flow financing the most. A company’s ability to obtain new monies advanced from their current lender may be cut off, and they may also fall into default of their loan covenants. A potential business bankruptcy looms.
Many times they are also behind on their tax payments. This is where Debtor in Possession (DIP) Financing from Bankers Factoring can help to utilize non-recourse invoice factoring if their continuing operation is in jeopardy and they are contemplating filing for Chapter 11 bankruptcy as an option.
For many distressed companies, there is hope for new financing. Using the United States Bankruptcy Courts, they can file for Chapter 11 bankruptcy protection. This will allow them to take advantage of Debtor-in-Possession (DIP) financing to help them reverse course, give them restructuring support, and return to profitability.
Many lenders and other financing sources see Debtor in Possession financing as an attractive lending opportunity because of the special treatment that business bankruptcy loans receive under U.S. bankruptcy law. Under the law, DIP creditors are typically repaid before other creditors.
In fact, lenders will commit to a DIP Chapter 11 loan while they would not make a loan commitment to the same business in the absence of a bankruptcy filing because of the priority over existing debt, equity, and other claims.
What is the DIP Financing Process?
In DIP restructuring finance, the assets pledged as collateral must be sufficient to cover the business bankruptcy loan or credit facility.
Here’s how the DIP Chapter 11 financing process works:
When the company has located a DIP factoring company willing to finance its turnaround, the company seeks court approval from the Bankruptcy Court. Typical DIP financing terms include a “first priority” security interest in the collateral, a market rate or even premium rate of interest, an approved budget, and other lender protections. Creditors may object to the factoring facility if they feel it weakens their position. The Bankruptcy Court will decide whether or not to approve the new credit facility or loan.
If a company in Chapter 11 bankruptcy has existing secured loans, and it wants to borrow on a secured basis that is equal or senior to the existing loans, one, it will need to obtain the existing lender’s consent to the new facility, or two; it will have to convince the Bankruptcy Court that the existing lender will be “adequately protected” (their position will not be degraded by the new DIP credit facility).
A current lender who provided financing to the firm prior to its bankruptcy filing may be willing to commit to a DIP business bankruptcy loan, even if it has declined to make further advances prior to the bankruptcy proceeding. In addition to the added protection under the Bankruptcy Code, the lender may also have its own goals in making the DIP loan, for example, to help improve the company so that it can ultimately be sold to another party.
If the Bankruptcy Court approves a DIP loan or funding facility and finds that it was made in good faith, the loan will not be subject to legal challenge. That differs from the same loan made outside of bankruptcy, which might have been subject to challenge.
Also, if your company has solid A/R but is losing money and the personal credit of the owners is low, Bankers Factoring can help but many banks and traditional lenders cannot offer an A/R-based business line of credit for a myriad of reasons.
How is Bankers Factoring’s Accounts Receivable Factoring used in DIP Financing?
Companies can also use A/R factoring as a financing tool in DIP financing, a possibility that many small business owners do not realize. In fact, accounts receivable financing can be the fastest and most flexible way to obtain financing and recapitalization during the Chapter 11 bankruptcy process.
DIP Factoring can be a win-win for both the borrowing company and the factoring firm. The company obtains needed financing that is not based on its own credit status, and the DIP factoring firm achieves priority status under the Bankruptcy Code.
Many times, it was customer credit issues that pushed a company into bankruptcy. A Bankers Factoring Credit-Protected A/R Facility stops that from happening again.
The Bottom Line in a Tough & Distressed Business Situation
If your company is experiencing financial distress, it is important to consult an experienced bankruptcy attorney and a restructuring/turnaround specialist to determine all of your viable options. A workout or other restructuring process outside of bankruptcy might be a better option for your unique situation. However, if you determine that bankruptcy is your best option, DIP financing may provide a strong opportunity to help turn your company around.
Filing for Bankruptcy can be stressful, with Bankers Factoring as your DIP Funding Provider, we can offer our two decades of expertise in Debtor In Possession Facilities, bankruptcy exit financing, and other creative workouts/ distressed working capital solutions.
Disclaimer: We are not attorneys and this article should not be considered legal advice. Please consult an attorney or tax professional if you need advice.