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.
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.