Do’s and Don’ts for Seeking Debtor-in-Possession (DIP) Financing

Chapter 11 bankruptcy can be a lifeline for a business in financial distress. One vital aspect of successfully using this debt relief remedy is obtaining debtor-in-possession financing. DIP financing provides a company with the liquidity needed to cover operating expenses, including payroll, rent and other overhead. However, securing this type of financing requires careful planning and strategy. 

Here are some actions to take and to avoid when seeking DIP financing:

Do’s:

1. Assess your financing needs accurately — A thorough assessment of cash flow requirements will help determine the amount of financing needed and give a clear understanding of how the funds will be used. It will also help in negotiations with potential lenders, making it easier for you to justify the requested loan amount.
2. Prepare detailed documentation — Lenders will require comprehensive financial information. Ensure that your financial statements, cash flow projections, business plans and any other required documentation are accurate, detailed and up-to-date. This preparation serves to build confidence with potential lenders who are concerned about risk.
3. Approach multiple lenders — Contact a number of potential funding sources to ascertain the terms and conditions they offer. This approach allows you to compare rates, fees and conditions and to identify the options that might be most favorable. Having more than one lender available can create competitive pressure among them, which may avail you of more attractive terms.
4. Negotiate terms carefully — Terms of DIP financing can vary widely and often include covenants that can impact operations. Companies should carefully review terms such as interest rates, fees, collateral requirements and covenants to ensure they do not impede the company’s ability to successfully reorganize.

Don’ts:

1. Don’t delay the financing process — Postponed securing of financing can make it difficult for the company to continue operations and potentially jeopardizing the reorganization. 
2. Don’t overlook alternative financing sources — Besides banks and financial institutions, consider other lenders such as private equity or distressed debt investors, who may offer more flexible terms or faster access to needed funds.
3. Don’t underestimate the importance of court approval — The bankruptcy court, in approving DIP financing, must be convinced that the terms are fair and in the best interest of existing creditors. Avoid proposing terms that could be seen as preferential or onerous.
4. Don’t overlook operational considerations — Avoid financing deals that contain covenants which could negatively impact the company’s flexibility with respect to daily operations. 

Since DIP financing is a critical component of a successful Chapter 11, engaging a qualified Chapter 11 attorney early in the process can be of significant assistance. An experienced attorney can negotiate favorable financing terms, structure the DIP loan to support the company’s objectives and ensure compliance with legal requirements. 

The Law Offices of Michael Jay Berger in Beverly Hills is one of Southern California’s most experienced Chapter 11 bankruptcy law firms, with 12 locations across the region. If your company needs help with debt reorganization, contact us online or call 310-271-6223 to schedule a consultation.