| Investopedia: "Debtor in Possession Financing (DIP financing) is financing arranged by a company while under Chapter 11 bankruptcy process. DIP financing is unique from other financing methods in that it usually has priority over existing debt, equity and other claims. Chapter 11 gives the debtor a fresh start, which is, however, subject to the debtor's fulfillment of its obligations under its plan of reorganization. A key point is that the debtor is allowed to continue to continue business without an appointed trustee." (credit: investopedia.com) |
Most DIP financing is arranged against the company's accounts receivables and its inventory. Therefore, it is important to obtain an accurate valuation of assets. This is why asset-based lenders such as STAR are a perfect fit for DIPs. Asset-based lenders usually understand collateral coverage, so they can determine a true fair market value of the company's assets. Nevertheless, it is essential that the lender be able to present a substantial track record of accurate asset and A/R evaluations. Also, the value of the collateral must remain current for the life of the DIP.
The inevitable goal of the DIP lender is for the bankrupt entity to emerge from Chapter 11 strong and with prospects for expansion. For that reason dip financing is sometimes provided together with exit financing as one single commitment. Often the lender will continue to extend credit to the newly-emerged company under similar terms that prevailed under the DIP.
It is important for the DIP borrower to secure sufficient financing. This may be 30% or more than the original requirement. The worst thing for a bankrupt borrower is to have to restructure the DIP part way through the process. An experienced asset-based lender such as STAR can implement a strong enough credit to withstand the strain of the process.
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