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DIP financing can keep struggling businesses afloat

On Behalf of | Jan 16, 2023 | Chapter 11 Commercial Bankruptcy

Businesses in Pennsylvania and around the country need money to purchase inventory, pay employees and cover operating expenses like rent. Thriving businesses rarely have liquidity problems as banks are usually eager to provide them with funds, but obtaining credit can be very difficult for commercial ventures that are struggling. In these situations, companies may file Chapter 11 bankruptcy petitions and pursue what is known as debtor-in-possession financing to secure the money they need to remain in business. This form of credit is so named because the owners of a business can often remain in control during a Chapter 11 bankruptcy.

DIP financing

Banks are often willing to lend money to companies that have filed Chapter 11 petitions because the business bankruptcy laws protect them. When they agree to provide DIP financing, they must be paid before any other creditors. They also have priority if the business fails and its assets are liquidated. The rules dealing with DIP financing are strict, and the money can only be used to pay vendors and cover essential business costs like wages, utilities and taxes.

The DIP process

Businesses are more likely to be able to secure DIP financing if they file for Chapter 11 bankruptcy before their financial situations become dire. Businesses applying for DIP financing must submit detailed budgets, and they may be required to offer assets as collateral. Once the business and lender have negotiated the terms of the loan, the financing package is presented to the bankruptcy court handling the case for approval. When judges review DIP financing, they scrutinize the terms and conditions and consider whether or not the business will have the funds needed to make the required payments.

A lifeline for floundering businesses

Chapter 11 bankruptcies and DIP financing are lifelines for struggling businesses. DIP loans have strict terms and must be approved by a judge, but they can provide the money companies need to pay their bills, meet payroll and keep their doors open. When DIP loan applications are rejected, it is usually because the business involved waited too long to file for bankruptcy protection.