How DIP Financing in Chapter 11 Can Help Turn a Company Around
The goal of Chapter 11 bankruptcy is to help struggling businesses reorganize and become financially viable again. But every company — even one in Chapter 11 — needs adequate cash flow to keep operating. Debtor-in-possession (DIP) financing is a feature that can help a company get access to the cash it needs to remain operational as it restructures and attempts to return to profitability.
A debtor in possession is a company owner who is allowed to maintain possession and control of the business instead of having a trustee step in to take over. Once the owner is named a debtor in possession, the next task is to locate a lender who may be willing to provide financing. It may seem strange that any lender would want to lend money to a company in bankruptcy, but there is a good reason why they do. DIP lenders get priority rights under the bankruptcy code, meaning that if the company eventually fails, DIP lenders are the first to get their money back.
DIP financing can be provided by one of the company’s existing lenders or by a new lender found after filing Chapter 11. The choice of lender must be approved by the bankruptcy court. This typically requires a motion and a hearing. The company seeking DIP financing needs to:
- Get consent from its other creditors
- Explain to the bankruptcy court how its existing lenders will be adequately protected and not made worse off by the new loan
The business’s other creditors may appear at the hearing and may object to the loan.
Once the DIP lender gains court approval, the company and the lender will go through a budgeting exercise to forecast the business’s expected income and expenses. The budget must be approved by the court. Only after budget approval can the company and lender put together the actual financing package. The package is similar to most regular business loans in that the term, interest rate, repayment requirements and other features are negotiated between the lender and the business.
With the loan package details ironed out, the lender delivers the funds to the business, to be used for whatever purpose has been agreed to. This injection of cash can allow the company to keep paying its employees, fund its operations and support itself until it emerges from Chapter 11 as a healthier entity.
If your business is struggling and you want to learn about Chapter 11, DIP financing and other options that can help turn things around, the Law Offices of Michael Jay Berger in Beverly Hills can advise you based on our decades of experience. Call us at 310-271-6223 or contact us online for a free consultation.