DIP Financing Article: DIP Financing through Factoring
Going through a chapter 11 bankruptcy is a harrowing experience for business owners. There is the uncertainty of survival. Facing creditors and vendors. Dealing with the possibility of layoffs. And despite all, one has to press forward and try to save the business.
Getting out of a chapter 11 bankruptcy can be very difficult. More often than not, the only way to succeed is by getting as special type of bankruptcy financing called debtor in possession (DIP) financing. Companies that have debtor in possession financing have a better chance of success than those that don’t. However, qualifying for DIP financing is very hard.
Generally speaking, banks don’t offer business financing to bankrupt companies. This will rule out business loans as an option. However there is a specialized type of financing that under many circumstances works better than a business loan. This alternative is called factoring, and it’s been gaining traction as a DIP financing solution. Factoring is available to companies that sell products and services to other businesses or government agencies.
Let’s look at a common business problem. Most business clients pay their invoices 30 to 45 days after buying a product or service. In the meantime, while you wait to get paid, you still need to pay employees and suppliers. This is challenging under normal circumstances and can be impossible for companies undergoing a chapter 11 bankruptcy. Invoice factoring fixes this problem.
Factoring invoices provides you with an immediate advance upon invoicing. The advance is usually about 80% of the invoice. This provides you the necessary liquidity to meet current expenses. You get the remaining 20%, less a small fee, once the customer pays the invoice. One clear advantage of accounts receivable factoring is that you can start taking new customers without worrying about their payment habits. This can offer the necessary breathing room to let your company work out its solvency problems.
Factoring financing is relatively easy to qualify for. The biggest requirement is that your company must sell products or services to credit worthy businesses (or government entities) at a profit.
Although not every factoring company offers DIP financing, you will find many factoring companies willing to work with you. As would be expected, the factoring relationship will need to be approved by the court. Also, any secured creditors will have a say in the relationship. However, entering into the factoring relationship should not be too problematic if you can show how your business and its creditors will benefit from it.
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