DIP Financing--Financing Your Company in Chapter 11

Factoring accounts receivable may be the simplest, least costly, and most flexible financing available for small businesses in Chapter 11. If you are considering a reorganization, but thought that filing for protection against your creditors will prevent you from being able to obtain financing for your accounts receivable, think again.

Factoring accounts receivable is one of the simplest and most commonly available financing tool available to debtors-in-possession (“DIP”) or companies operating under the protection of the bankruptcy court. Many small businesses mistakenly believe there are no financing options available to them in bankruptcy.

The fact is that factoring companies seek out companies in reorganization, because the bankruptcy court can provide funding sources like factoring companies priority status in the proceedings that makes factoring accounts receivable an attractive proposition for both the factoring company and the client.

There are a few simple motions that have to be granted by the judge, and opposing creditors may object, but the process is usually speedy and inexpensive. Consult with a bankruptcy attorney before filing for reorganization to obtain an opinion about the possibility that you might qualify for DIP financing post petition. Typically, if most of your pre-petition debts are unsecured and if you hadn’t pledged your accounts receivable as collateral to any creditors, there is a good chance you may be able to obtain post-petition financing from a factoring company.

We have had numerous success stories assisting companies in reorganization emerge much stronger companies, free of many of their pre-petition obligations that created the need for reorganization. Companies that factor their accounts receivable pre- or post-petition do not incur debt, but rather, raise funds through the ongoing sale of their accounts receivable. As DIPs generate new sales, those sales are converted to immediate cash by the factoring company, and the factoring company collects the accounts receivable directly from its client’s customers. Each transaction is self-liquidating, so no debt is ever created. By factoring their accounts receivable, DIPs re-establish their credit so that eventually, they emerge from bankruptcy protection and re-qualify for traditional bank financing.

Ordinarily, the filing of any bankruptcy petition, including a Chapter 11 or Chapter 13 reorganization, is considered a credit blemish that might make obtaining credit in the future a challenging opportunity. Certainly, most banks would view it that way. Factoring companies, on the other hand, do not consider your or your company’s credit history in determining the viability of your company as a factoring candidate. The factoring company is more interested in the ability of your customers to pay their debts than your company’s ability to pay its debts. Factoring companies will perform credit checks on your customers and examine your accounts receivable for trends in the way your customers are paying your invoices and determine eligibility based on the aging of your accounts receivable in total.

Banks, by contrast, examine your and your company’s ability to repay its debts in determining your eligibility as a borrower. That’s why the filing of a bankruptcy petition indeed makes obtaining bank credit more difficult than obtaining a factoring credit facility from a factoring company.

Author: Tony Furman
Copyright 2009
Interstate Capital Corp.

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