How Does DIP Financing Work?

DIP financing is a way companies who are going through bankruptcy can get finance to keep their business going. DIP is s short form for “Debtor in Possession” so how does DIP financing work?

There is no doubt that in the world of business, cash is very important to any kind of transaction. Companies that do not have enough cash may not be able to run the affairs of their company.  Because the truth is that, no matter the amount of hardship the company is going through, employees, vendors, and tax authorities need to be paid for the business to keep on running.  When a company gets to a point where it does not have enough cash to sustain the business, it can be declared bankrupt.  The company can possibly get some financial aid by getting financing via the sale of debentures, getting credit from vendors, getting financing from lenders or commercial banks, etc.

When a company is facing financial challenges, two things are likely to happen. One of the things is that the company may need more money to help it run its operations so it can keep carrying out transactions and making money. You need money to make money.  Hence the demand for financing is on an increase.  Most times, at this point all traditional lenders may not be willing to lend money to the company.  Hence the supply of cash goes down, which then automatically increases the demand for cash. The reduction in supply and the increase in demand is called a cash crunch. No company prays to be in such a situation because this causes a lot of pressure and may lead to bankruptcy.

How to Get DIP Financing

When a company needs DIP financing, it needs to have a list of lenders and their details as related to the loan. These details include the interest rate of the lender, repayment schedule, etc.  Another piece of information that is needed details on how the money that is going to be given would be used. When all the information is set and ready, These documents are then submitted to the court for approval. Getting DIP financing is difficult to an extent and is not usually a very favorable option. But when there are limited options, DIP Financing is not a bad idea. One of the things that makes DIP financing a challenge is a fact that the company needs to convince the court that its current situation will not affect the creditors.  The major challenge with DIP financing is that it takes a lot of time. Companies under the threat of bankruptcy need to reach out quickly in order to benefit from the DIP financing.  The truth about DIP financing is that it is a valuable tool that needs to be used correctly if anyone hopes to benefit from it. It can provide funds to companies that have cash flow challenges there are going through.  Most companies need to begin to pay attention to DIP financing.