Obtaining Debtor-in-Possession (DIP) Financing During Chapter 11

For companies bordering on financial collapse, Chapter 11 bankruptcy can offer relief through protection from creditors and a debt restructuring plan that provides a way to return to solvency. But the reorganization process requires access to capital. This is why debtor-in-possession (DIP) financing is critical. It allows the debtor, who remains in possession of the company’s assets and operations during the Chapter 11 case, to fund essential expenses and maintain business continuity. 

Chapter 11 proceedings can be lengthy and expensive. Without access to working capital, businesses risk grinding to a halt, jeopardizing employee payrolls, vendor relationships and ultimately, the entire reorganization. DIP financing bridges this gap, providing the resources needed to meet ongoing operational expenses (including payroll) and to pay for essential services, such as hiring legal and financial advisors. It can also help maintain customer and vendor relationships, minimizing disruption.

Securing DIP financing requires cooperation of lenders. It typically takes the form of secured loans, often with priority over existing debt. Lenders will be understandably cautious and will scrutinize requests for loans based on such factors as:

• The viability of the restructuring plan and its realistic chance of success
• The company’s financial condition, looking at assets, liabilities, and cash flow
• Availability, value and marketability of collateral
• The company owners’ management experience and track record

There is significant incentive for DIP lending in some cases. DIP lenders automatically receive first priority status in a Chapter 11, which means they are the first creditors to receive payments if the business ultimately fails. In fact, lenders might make DIP loans to companies to which they would not otherwise extend credit.

For the debtor, the process of securing DIP financing involves several key steps:

• Develop a reorganization plan — This plan should demonstrate the expected financial viability of the company and the DIP financing needed to achieve it.
• Approach potential lenders — Start with existing lenders who are familiar with the company’s business and then expand to lenders that specialize in DIP financing.
• Prepare a budget — This includes a forecast of the company’s revenues, expenses and cash flow for the foreseeable future.
• Negotiate the terms — Carefully review and negotiate the loan terms, interest rates, fees and collateral requirements. Most often, DIP financing comes in the form of a term loan though a revolving credit line is occasionally used.

Once terms are finalized, the company must seek court approval for the DIP financing agreement and budget. The business’ current lenders usually have to agree to the choice of DIP lender as well. A bankruptcy attorney skilled in DIP financing arrangements can guide the company through the process.

The Law Offices of Michael Jay Berger is here to help. Our Beverly Hills lawyers have extensive Chapter 11 experience and can advise you on all aspects of DIP financing. To arrange a free initial consultation with one of our attorneys, please call 310-271-6223 or contact us online.