What is Debtor-in-Possession (DIP) Financing?
How Does Debtor-in-Possession (DIP) Financing Work?
Under Chapter 11 bankruptcy, a business files for protection from creditors while it reorganizes itself. During the reorganization process the bankruptcy count allows the business to secure additional financing from lenders in order to continue its operations. Under the jurisdiction of the bankruptcy court, such post-bankruptcy lenders assume a senior position on liens and security interests in the business assets, normally by consent of the pre-bankruptcy senior lenders. In practice, the continued operation of the business allows the debtor in possession to reorganize, reposition itself, and improve its chances of repaying its debts.
Why Does Debtor-in-Possession (DIP) Financing Matter?
DIP financing is important since it extends a lifeline to any business in Chapter 11 bankruptcy, enabling it to maintain payroll and suppliers, stabilize operations, restructure its balance sheet, and eventually repay creditors and emerge from bankruptcy. A business in bankruptcy is normally able to obtain DIP financing only by giving its post-bankruptcy lenders protection in the form of a senior lien position. While a senior lien position ensures that the lender will be repaid fully even in liquidation, it also limits the business with strict payment terms, which can hinder the reorganization process. Strict oversight by the bankruptcy court serves as an additional protection to DIP financing lenders, helping to assure that new credit can be extended to businesses in bankruptcy.