Debtor in Possession Finance is used by companies that are in a downward cycle and are under performing debt obligations. Many companies have used Chapter 11 Bankruptcy laws to help reorganize and restructure debt with critical vendors and secured lenders. This process is complex but can be simple if the business has seasoned professionals helping out and the main assets involve accounts receivable.
Chapter 11 allows a company to renegotiate with its lenders and suppliers, and reject or accept contracts that existed prior to bankruptcy. Incredibly, this allows a debtor in possession to clean up its balance sheet through modifying, eliminating debt, taking on new vendors and lenders willing to finance a bankrupt company through a plan of reorganization.
For companies that have accounts receivable assets with Business to Business transactions, utilizing a factoring company for Dip Financing, also referred as DIP Factoring should take less than a week to complete. This time period may depend on the size of the organization, number of lenders/creditors involved and how much kicking, screaming and resistance the existing secured lenders want to exhibit.
For most situations, accounts receivable can be valued in one day, and have funding available to purchase the receivables using DIP Factoring within 5 working days. Funding is usually available after the Term Sheet and Financing Orders are accepted and executed by the court.
This method of financing is simple to understand, and doesn’t involve the traditional slow moving lenders that typically are involved in this industry.
The reality is none of the lenders want to go through a liquidation. This involves spending more money to assess property, inventory and machinery valuations. In addition to the storage fees, appraisal fees, auction fees and the time spent during the process is very important to consider for lenders when they authorize the new Dip Financing Lender.
The most difficult thing a business owner can do is accept the company is failing, and wait until the last minute to file chapter 11. The best time to execute the prepetition is while the company is still operating and current on payroll obligations and the supply chain is flowing. Any disruption with employees not getting paid, customers not getting their products, and suppliers cutting off vital inventory items will likely discourage many potential new lenders.
Funding accounts receivable under a chapter 11 is the same and ordinary as a non-bankruptcy client with the exception that we are getting a superpriorty lien on all assets and proceeds, or whatever was negotiated as the collateral during the prepetition process.