DIP Debtor in Possession Financing

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What Is Debtor-in-Possession (DIP) Financing?

Debtor-in-possession (DIP) financing is a special kind of financing meant for companies that are in bankruptcy. Only companies that have filed for bankruptcy protection under Chapter 11 are allowed to access DIP financing, which usually happens at the start of a filing. DIP financing is used to facilitate the reorganization of a debtor-in-possession (the status of a company that has filed for bankruptcy) by allowing it to raise capital to fund its operations as its bankruptcy case runs its course.

DIP financing is unique from other financing methods in that it usually has priority over existing debt, equity, and other claims.

Obtaining Debtor-in-Possession (DIP) Financing

DIP financing usually occurs at the beginning of the bankruptcy filing process, but often, struggling companies that may benefit from court protection will delay filing out of failure to accept the reality of their situation. Such indecision and delay can waste precious time, as the DIP financing process tends to be lengthy.

Once a company enters into Chapter 11 bankruptcy and finds a willing lender, it must obtain approval from bankruptcy court. Providing a loan under bankruptcy law provides a lender with much-needed comfort in providing financing to a company in financial distress.

Once the DIP budget is agreed upon, both parties will agree on the size and structure of the credit facility or loan. This is just a part of the negotiations and legwork necessary to secure DIP financing.

Debtor-in-Possession (DIP) Financing

The approved budget is an important aspect of DIP financing. The "DIP budget" can include a forecast of the company's receipts, expenses, net cash flow, and outflows for rolling periods.

DIP financing is frequently provided via term loans. Such loans are fully funded throughout the bankruptcy process, which means higher interest costs for the borrower. Formerly, revolving credit facilities were the most utilized method, which allows a borrower to draw down the loan and repay as needed; like a credit card. This allows for more flexibility and therefore the ability to keep interest costs lower, as a borrower can actively manage the amount of the loan borrowed.

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