When your business in California is facing bankruptcy, you will need to find ways to finance your restructuring. One option that most people consider is debtor in possession, or DIP, financing.
What should you know about DIP financing?
Debtor in possession financing is a type of loan available to businesses going through Chapter 11 bankruptcy. It allows a company to continue operations while it restructures its debt. The lender provides funds to the business to pay its creditors and maintain day-to-day operations.
The terms of DIP financing vary from case to case, but they typically last for a few months. At the end of this period, the company must either come up with a plan to repay its debts or go through liquidation.
How does debtor in possession work?
When you file for Chapter 11 bankruptcy and the court declares you bankrupt, it will appoint a trustee to oversee the restructuring of your business and ensure that you pay creditors. To do this, you need to develop a plan for how you’ll repay your debts and present it to the bankruptcy court. If the judge approves, you’ll be able to apply for funding from lenders. The common reasons why businesses use DIP financing include:
- To keep employees on payroll
- To pay rent or utility bills
- To continue purchasing inventory
- To keep the business afloat while it restructures its debt
What are the challenges of DIP financing?
First, it can be difficult to obtain funding. Lenders will want to see a detailed business plan, and they’ll be closely scrutinizing your financial situation. Second, DIP financing typically comes with high-interest rates. This means that you could have paid less if you resorted to other financing methods. Finally, there’s always the risk that the court will not approve your restructuring plan. If this happens, you’ll need to find another way to repay your debts or face liquidation.
DIP financing can be a helpful tool for businesses going through bankruptcy. However, before you decide to use it, weigh the pros and cons carefully to see if it is right for you.