Over the past couple of years with COVID-19, many companies find themselves in distress and feel there is no way out. Many companies may consider filing for Chapter 11 bankruptcy protection as a way to restructure their business. Some owners might not be aware that there is still a way to obtain financing after filing  called Debtor in Possession financing.

What is DIP Financing (Debtor in Possession)?

DIP financing is a type of funding available for businesses that have filed for Chapter 11 bankruptcy protection from creditors. It is a good fit for companies when creditors and the bankruptcy judge believe the company has a credible chance to stabilize cash flow and a viable plan to turn itself around to exit bankruptcy.

All new financing requires approval from the bankruptcy judge. Additionally, if the company has existing debt, it will need to seek consent from current lender(s) for any new financing. The goal is to help the company turn around, which would better enable the borrower to repay their existing debts.

How can Factoring play a role in DIP Financing?

Factoring, or accounts receivable financing, is a flexible way to obtain funding for recapitalization during a Chapter 11 bankruptcy. Companies that factor their accounts receivable do not incur debt, but rather, sell an asset, their invoices . Accelerating cash flow by factoring helps a business re-establish its credit, so eventually it can qualify for traditional bank financing. In the end, factoring can be a win-win-win for the borrowing company, its creditors and the factoring firm. The borrower receives needed funding, cash flow is available for debt repayment while the factoring firm provides funding based on the borrower’s customer base.

In short, if a company is in distress and files for Chapter 11 bankruptcy protection, it still has options. It may be able to take advantage of DIP financing to get back on track, provide restructuring support, and return to profitability.