Supervisors and many small business people are not aware of the expression in DIP (Debtor-in-possession) Financing . DIP financing revolves around companies who are in distress and most of the time in a bankruptcy proceeding.
Why would anyone want to finance a business that is bankrupt? The reason is that companies, particularly those that have assets are a prospect of emerging from bankruptcy as a realistic chance of being profitable again. We say debt since assets original lenders, are in fact going to take an entire loss that is partial, or in cases on their funding.
DIP is a very specialized area. Enjoy the highest degree of security over the assets. The business while it’s in a bankruptcy’s goal is to emerge with funding. The players and specialized finance companies in this field of funding have an inclination. A lot of the banks which take losses and finance companies have DIP branches provide the bankrupted company with capital.
The gist of DIP financing is the DIP lender is given a priority security on the firm’s assets. Needless to say that whenever a business is in a bankruptcy preceding which the rates of interest on the funding can in a lot of cases be quite a bit higher compared to in its normal operating small business model.
The benefit of a DIP lender are many – often times are actually over secured. That’s to say, for instance, that a DIP lender can be supplying a 5 Million dollar funding for the consumer during bankruptcy while the total assets could be values higher.
In a lot of cases DIP financing are big, and in the case two or in reality many lenders, band together to make the temporary working capital funding for the company as it re – organizes. In several cases DIP lenders might intend to have a future partial ownership in that the post bankrupt firm, as well as of course, their place at line as priority lender over all others.
Many larger institutions create large multi million funds which focus on making investments at DIP funding and partial future ownership of the company. Generally the contest for DIP funding is in reality growing – as ironic as it appears to the lay person and non fund specialist, there’s money in bankruptcy.
If a business is in bankruptcy there’s still certain, if not a great deal of risk involved with DIP financing and the likelihood of a final successful development and re-financing of a firm.