If you aren’t familiar with the term DIP financing, well, that might be a good thing. That means your company hasn’t had to explore the possibility of bankruptcy.
DIP (which means debtor-in-possession) financing is for companies in financial distress, primarily for those who have filed for Chapter 11 bankruptcy. Even if you think you may never have to worry about bankruptcy, it’s good to understand what DIP financing is. It is important that you obtain financing PRIOR to filing for bankruptcy protection. To do otherwise seriously jeopardizes your ability to survive.
Remember, even if you are contemplating filing bankruptcy, that does not have to mean the end of your business. Many companies successfully emerge from bankruptcy and DIP financing can be one of the tools your company uses to get it through a difficult time.
Here are five things you should know about DIP financing.
1. This form of debt can allow a company to continue operating until the assets of the company are sold or the business is successfully reorganized. Companies in distress need money to continue operating. But they may already have cash flow problems, and once they have filed for Chapter 11, other forms of credit may dry up, they may begin to lose revenue as customers go elsewhere and they may have additional expenses related to the bankruptcy. So, they may need another source of cash quickly. DIP financing is often the best answer.
2. DIP financing can sometimes be obtained from an existing lender. Sometimes an existing lender will lend money in the form of a DIP loan. They may do so to protect their interests, finance a sale or to protect a liquidation of your assets. The majority of DIP lenders last year were interested parties, according to DebtWire’s North America DIP Financing Report for 2016.
But a current lender may be reluctant or unable to increase its debt level with a company that has filed Chapter 11. A DIP from another lender can be the answer to obtain financing when other sources are not available.
3. Unlike some forms of debt, DIP financing takes top priority, despite it being the newest form of financing for a company. Remember, “Last in, first out”. This is referred to as super priority. A DIP load will be paid back before any other existing debt. This of course is critical to the lender as they have reassurance they will most likely get paid back, even if the company ends up being liquidated. Note that Administrative Claims of the Bankruptcy could be carved out prior to your Super Priority Claim. A good lawyer can assist in this process.
4. Interest rates can vary widely. Rates in 2016 varied from 12% to 18%, according to DebtWire’s DIP Financing Report. Most had maturity rates of less than a year, while some were as short as three months. Note that interest rates for smaller DIP loans (less than $1.0 million), which have more risk to the lender could approach 20%+ range.
Amounts vary widely as well. I’ve worked with companies that needed DIP loans of less than $1million but most required millions of dollars to finance their survival.
5. DIP financing can help restore confidence to the company’s vendors and customers. Knowing that a lender has examined the business and its ability to repay the money, and is willing to lend it more money can help calm concerns in the market. Customers and vendors that may have been tempted to take their business elsewhere may be reassured that the company has the funds to continue operations, keep vendors current and is committed to emerging from bankruptcy.
If you’d like assistance in obtaining DIP financing, please contact me directly at LKatz@GlassRatner.com or (404) 307-6150. We have many sources throughout the country. We also have several local lenders that specialize in smaller credit facilities.