DIP financing may be the simplest, least costly, and most flexible financing tool available for debtors-in-possession (“DIP”) companies operating under the protection of the bankruptcy court. With DIP financing, the board of directors or the company’s owner still owns the company, which is what the “in possession” part of “debtor-in-possession” means. Those owners are often strongly committed to working through the process, but they can face some serious challenges. If you are considering a Chapter 11 reorganization, but thought that filing for protection against your creditors will prevent you from being able to obtain financing for your accounts receivable, think again.
The fact is that factoring companies help many companies in reorganization continue to stay in business. The bankruptcy court can provide funding sources – such as factoring companies — priority status in the proceedings. That makes factoring receivables an attractive proposition for both the factoring company and the client. Top-tier factoring companies that work with DIP clients can point to many success stories in which clients emerge with stronger companies, free of many of their pre-petition obligations that created the need for reorganization.
Factoring is an economical and fast funding source if you have creditworthy clients that still owe your business money. If you have already filed for bankruptcy, then you might not be in the position to wait 30, 60 or even 90 days for your clients to pay you. Factoring can close this gap between invoicing and payment and give you the quick access to cash that you need to get your company back on track.
Key points to consider about DIP Financing
Here are some key points to keep in mind as you consider how DIP financing could work for you:
- First, you are not alone. Many companies facing financial hardships file for Chapter 11 bankruptcy to work things out with their creditors and many turn to factoring companies for temporary support until they are back on track.
- Consult with a bankruptcy attorney before filing for reorganization to obtain an opinion about qualifying for DIP financing, post-bankruptcy petition.
- The DIP financing process is usually speedy and inexpensive. A judge can grant a few simple motions and you can get started with your choice of factoring company.
- Typically, if most of your pre-petition debts are unsecured and if you hadn’t pledged your accounts receivable as collateral to any creditors, you are likely to be able to obtain post-petition financing from a factoring company.
- DIP financing isn’t usually available to a company that is about to be liquidated; it is reserved for companies that have the potential, in the lenders’ perception, to be profitable again.
- By factoring their accounts receivable, DIP companies re-establish their credit so that eventually, when they emerge from bankruptcy protection, they can re-qualify for traditional bank financing.
DIP Financing: No-Debt Cash Flow Solution
You may hope to qualify for a new business loan to close the gaps, but this is unlikely to happen after your business has already filed for bankruptcy. Just when you need funding the most, you might realize that your traditional sources of funding are disappearing and you don’t have many options. Factoring your accounts receivable is an accessible, affordable option that does not add more debt to your balance sheet – or more stress on you and your employees.
- Companies that factor their accounts receivable pre- or post-petition do not incur debt, but rather raise funds through the ongoing sale of their accounts receivable.
- As DIP companies generate new sales, the factoring company converts those sales into immediate cash.
- Each transaction is self-liquidating, so no debt is ever created.
You are not borrowing money with factoring. An invoice factoring company will essentially purchase your unpaid invoices and advance you a large portion of the outstanding amount. Once your customer has paid, you will receive the remaining amount minus a small factoring fee. Factoring puts your accounts receivable to work for you right away.
Benefits of DIP Financing
While you are navigating working through a Chapter 11 or Chapter 13 reorganization, you typically still have to pay employees, vendors, rent or mortgages, suppliers, company expenses, and stakeholders. With Debtor-in-Possession financing, you can gain the capital you need to help your business through Chapter 11 bankruptcy. Too many business owners believe that their company will close after they have filed for bankruptcy, but DIP financing gives them another chance.
Business immersed in the filing of any bankruptcy petition that choose to work with a well-established accounts receivable factoring company can also expect other benefits:
- Easy and fast qualification: Bankruptcy could be considered an obstacle for getting funded, but factoring companies are more interested in the ability of your customers to pay their debts than your company’s credit score or payment history. A good factoring company should be able to get you started within a day or two of your paperwork submission.
- Protection from creditors: Besides providing the money you need to keep your employees working and your company operating, this kind of funding also protects you from creditors so that you don’t fall further into financial distress.
- Credit checks: Factoring companies will perform credit checks on your customers and examine your accounts receivable for trends in the way your customers are paying your invoices and determine eligibility based on the aging of your accounts receivable in total.
- Collections service: The factoring company collects the accounts receivable directly from its client’s customers, saving the clients time and separating the client’s sales activities with customers from its collections chores.
DIP financing with Interstate Capital, one of North America’s leading factoring companies, can give you the time and resources that you need to reorganize and run your company. You can keep your creditors happy, restore confidence in your business, and get the funds you need to move forward.