DIP Financing Article: Factoring and DIP Financing
Going through a chapter 11 bankruptcy processes can be one of the most harrowing experiences that a business owner can go through. You will have to deal with the courts’ involvement in your business and deal with endless negotiations with your secured and unsecured creditors. You will also have to deal with the uncertainty of not knowing whether your business will survive the process. One way to help your chances of business survival is to obtain debtor in possession (DIP) financing.
Debtor in possession financing is a type of financing that is extended to companies that are about to go or are undergoing chapter 11 reorganization. It provides the company with the liquidity that is needed to operate through the reorganization process and provides the lifeline that may help the company emerge from the bankruptcy process. Most conventional debtor in possession financing is hard to obtain and usually not readily available to small and medium sized companies.
For example, few banks will provide business financing to bankrupt companies. This is understandable, as banks usually provide business loans to companies that have solid financials, hardly the case for a company going through a chapter 11 reorganization. Since a business loan is not an alternative for most debtor in possession companies, are there other alternatives? In fact, there are. There is an option that is usually overlooked by most. It’s called factoring. Furthermore, as opposed to other alternatives, it’s easy to obtain and setup.
If your company sells products or services to other businesses (or government agencies) you most likely have to wait 30 to 60 days to get your invoice paid. Waiting to get paid can negatively impact your liquidity, as you will need the funds to pay suppliers, employees and other business expenses. By factoring your invoices, you can get an advance on your slow paying invoices. This provides you the cash liquidity you need to meet your payment obligations.
Qualifying for accounts receivable factoring tends to be a lot easier than obtaining other types of financing. The biggest requirement is that you do business with reputable commercial or government clients. It also works best if one of your biggest challenges is lack of liquidity due to slow paying clients.
Generally, factoring financing lines can be established very quickly. However, debtor in possession financing requires the approval of the court and of your secured (or senior) lenders, which should be taken into consideration.
In summary, receivables factoring remains a strong a viable alternative that need flexible DIP financing.
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