May 3, 2019

The Benefits of DIP Funding

Law firms serving Chapter 11 clients must be talented multitaskers. These attorneys must skillfully navigate bankruptcy laws while adeptly advising clients on business plans and collection matters. Also known as a debtor-in-possession (DIP), a person or entity that has filed for reorganization under Chapter 11 bankruptcy laws needs the one thing it lacks to move forward successfully: capital. These clients can find the road to renewed success with DIP funding.

Help Clients Chart a Course for Success with DIP Funding

The value of a struggling business as a whole is often less than the value of its individual parts. Whether the company’s struggles arose due to inadequate capitalization, business growth outpacing planning, or unexpected market turns, distressed businesses need a clear path to reverse that course. As is often the case, it takes money to make money.

DIP funding offers a way for businesses to get back on the road to financial health. This option provides the funds to help struggling businesses meet their current obligations, achieve financial stability, and lay a course for a successful future despite the many challenges they face.

Obstacles Distressed Businesses Must Overcome

A DIP client needs capital to remain operational while formulating a new business plan, but conventional lenders may be hesitant to extend them credit on reasonable terms.

DIP funding provides the necessary capital to finance the business’s operations during the restructuring process. This financing method provides the capital for a distressed business to meet obligations like these:

  • Employee salaries and benefits;
  • Vendor costs;
  • Facilities and utility costs;
  • Tax obligations; and
  • Legal and other consultation fees to aid in the restructuring process.

The Effect of DIP Funding on Debt Priorities

Once a business files for bankruptcy under Chapter 11, debt priorities can change. A Chapter 11 business that takes advantage of DIP funding may find that the new debt obligations have priority over pre-filing debt. Law firms advising these clients help them balance the competing interests of their employees and creditors in a manner that offers the best overall outcome to all stakeholders.

The Challenges of Law Firms Serving Debtors-in-Possession

By definition, a debtor-in-possession has filed for Chapter 11 protection because it cannot meet its financial obligations. The Chapter 11 proceeding buys time to create a new business plan to make the company viable again, but the new plan must also consider the best interests of the business’s employees and creditors.

An attorney assisting a DIP client must be proficient both in the company’s substantive area and in bankruptcy law. The attorney must also help the client balance the sometimes competing interests of the business, its employees, and its creditors.

Distressed businesses also call on legal counsel for advice about how to secure the key ingredient to future success: capital. To help their clients improve their financial health, savvy Chapter 11 attorneys inform their clients about the many benefits of DIP funding.

The Fuel to Take Distressed Businesses to the Top

DIP funding affords businesses walking a financial tightrope the means to regroup and build success. If your law firm works with Chapter 11 debtors-in-possession, Pravati Capital can help. For more information, call us at 844-772-8284 or complete our online contact form.


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