While many people may be unsure of the details of this option, this type of financing is designed to help distressed businesses recover and relaunch. In this article, we will discuss the Trigger Event, Requirements, Benefits, and Orders that trigger this process. If you need additional information on this type of financing, please contact a licensed financial adviser. The benefits of the debtor in possession financing are numerous.
Requirements
If a company has declared bankruptcy or has a pending Chapter 11 case, it may be eligible to receive debtor in possession financing. This type of financing is a valuable source of new funds to get the business back on its feet. However, the debtor in possession financing is only available to companies that have a viable turnaround plan and are in possession of their current management and board of directors. Generally, this type of financing is available only to distressed businesses.
In order for a debtor to be able to obtain DIP financing, it must be able to secure a loan with favorable terms. To qualify, the debtor must grant the secured party first priority over the debtor's assets and earnings. Otherwise, the debtor would be unable to fund ongoing operations and meet net working capital requirements. While pursuing a POR, DIP financing allows a debtor to continue operations and keep its creditors' claims intact.
Benefits
Whether your company is suffering from financial distress or is considering bankruptcy, the debtor in possession financing can help you recover your cash flow. As the name suggests, debtors continue to own their assets, using them as collateral to secure loans. This type of financing is ideal for businesses that are struggling to meet their monthly expenses or those that have experienced a significant decrease in their credit score or missed payments. Listed below are some of the benefits of the debtor in possession financing for businesses.
The debtor in possession financing can save your business from liquidation, but the terms are very strict. You will need to receive court approval, but it is well worth it if the debtor in possession is still capable of paying off its obligations. Besides being a great option for distressed businesses, the debtor in possession financing can give your company the money it needs to restructure its business and get back on track.
Orders
While interpreting the terms of an order in debtor in possession financing, a court should always consider the context of the order before implementing any of the terms. In this case, the DIP providers were affiliates of the debtor, which meant that the order only applied to claims against the lenders' affiliates. In the case of these "ritualistic" provisions, the court's interpretation of the terms was limited to what the lender and its affiliates could reasonably expect from the order.
The bankruptcy court has specific requirements when considering an order in debtor in possession financing, and it is vital that parties understand these requirements before making any final decisions. Standard language can have unexpected results, so parties should be very careful in selecting the language used in the document. If the debtor does not follow the rules laid down in the order, they may find themselves in over their heads in a situation where they cannot pay back their debts.