When a business files for Chapter 11 bankruptcy, cash flow often becomes the biggest obstacle to survival. Vendors still need to be paid, employees still expect payroll, and operations must continue, despite the company’s financial distress. Debtor-in-possession (DIP) financing exists to solve this exact problem.
DIP financing is a specialized form of funding available only to businesses that have filed for Chapter 11 bankruptcy protection. It provides working capital during the reorganization process, allowing a company to continue operating while it restructures its debts and works toward recovery.
Understanding DIP Financing
Businesses depend on liquidity to function. Normally, that liquidity comes from operating cash flow, bank lines of credit, trade credit, or investor support. But once a business reaches the point of default, those traditional funding sources often disappear.
DIP financing steps in when conventional options are no longer available. After a Chapter 11 filing, the business continues to operate under its existing management team, referred to legally as the debtor in possession. While the company is under court supervision, ownership and day-to-day control typically remain intact.
This structure allows the business to keep running while it reorganizes, rather than being forced into immediate liquidation.
When DIP Financing Is Used
DIP financing is most commonly used when a business has defaulted on its obligations and files for Chapter 11 bankruptcy with the intention of restructuring rather than shutting down.
The goal of DIP funding is to stabilize the business, preserve value, and give management the time and resources needed to execute a turnaround plan. Lenders will only provide this type of financing if they believe the business has a realistic path forward and a credible restructuring strategy.
Funds from DIP financing are often used to cover essential operating expenses such as:
- Employee wages and benefits
- Vendor and supplier payments
- Rent and utilities
- Taxes and insurance
- Legal, accounting, and restructuring costs
In many cases, accounts receivable play a key role in supporting DIP funding structures, including DIP factoring arrangements.
Why Lenders Provide DIP Financing
Lending to a business in bankruptcy would normally be considered extremely risky. However, bankruptcy law offers strong protections to DIP lenders, making these transactions more viable.
DIP lenders are granted priority status, meaning they are paid before existing creditors. If the business were ultimately liquidated, DIP lenders are first in line to recover against pledged assets. These protections significantly reduce lender risk and help make DIP financing possible.
How the DIP Financing Process Works
Most businesses seek DIP financing at or near the start of the Chapter 11 process. Timing matters, securing funding early greatly improves the chances of a successful reorganization.
The general process includes:
- Identifying a lender willing to provide DIP financing
- Negotiating terms, including loan size, structure, interest, and collateral
- Submitting the financing agreement to the bankruptcy court
- Court review and approval, based on the company’s viability and repayment prospects
As part of approval, the business is typically required to pledge sufficient collateral. In some cases, personal guarantees may be requested. Loan terms often include:
- A senior security interest in assets
- Court-approved interest rates or premiums
- Strict reporting and compliance requirements
Budgeting and Oversight Requirements
DIP financing usually comes with a court-approved operating budget. This budget outlines how funds will be used and helps ensure financial discipline during restructuring.
Common budget components include:
- Projected cash inflows and outflows
- Accounts receivable collections
- Vendor and payroll expenses
- Professional and advisory fees
- Planned capital expenditures
If a business already has secured lenders, additional approvals may be required to ensure existing creditors are adequately protected.
Who Typically Provides DIP Financing?
In many cases, DIP financing comes from an existing lender or creditor who already understands the business. Even if that lender previously declined additional funding, the enhanced protections provided under Chapter 11 may make DIP financing attractive.
Once financing is approved, management typically notifies vendors, customers, and partners that the business will continue operating during reorganization. This reassurance helps maintain relationships and stabilize operations.
How CapFlow Funding Group Fits In
At CapFlow Funding Group, we understand that bankruptcy does not always mean the end of a business—it can be a turning point. For companies with viable operations and receivables, DIP factoring and receivables-based solutions can provide critical liquidity during Chapter 11.
By unlocking cash tied up in outstanding invoices, businesses may be able to support operations, maintain vendor relationships, and execute their restructuring plans without relying solely on traditional DIP loans.
Final Thoughts
Debtor-in-possession financing can be the difference between liquidation and recovery. While the process is highly structured and requires court oversight, it gives businesses the breathing room they need to reorganize and move forward.
If your company is facing Chapter 11 and exploring funding options, understanding DIP financing—and alternative solutions like receivables-based funding—can help you make informed decisions during a critical time.
