Debtor In Possession Financing
In business, as in real estate, short-term financing is often needed as a bridge to help a project or business along until a more permanent solution is found. In extreme cases, a business filing for Chapter 11 bankruptcy needs capital to keep operations going through the process. In less extreme cases, businesses need a temporary capital infusion until long-term financing comes through. In real estate, investors often require short-term financing on a property they expect to resell within a few months or years.
For all of these purposes, traditional financing is typically not available or not practical. They are time-sensitive situations that require creative, decisive and rapid financing solutions. For businesses in financial distress, DIP financing is often their only hope; and for businesses or real estate investors needing a quick capital infusion, a bridge loan is usually the most practical short-term solution.
DIP Financing Under Restructuring
In many cases, the difference between success and failure for a company trying to emerge from bankruptcy is the availability of sufficient capital. Without it, companies risk not being able to cover their operating expenses as they work to restructure their debt and execute a reorganization plan. However, as a “debtor in possession” (DIP), as defined by federal bankruptcy law, companies filing for bankruptcy are eligible for special financing while they are restructuring. For companies otherwise unable to raise or borrow capital, DIP financing can provide the critical bridge to financial recovery.
DIP lenders, which can be any of the existing lenders for a business or any lender that wants to participate, are given a senior lien position which protects their downside risk. They also are protected by the assets of the company which are pledged as collateral. When the company emerges from bankruptcy the loan can be converted into a long-term credit facility or into equity.
Bridge loans are designed as a short-term financing solution which can be provided quickly, but at a higher cost than conventional financing. They are typically used by businesses and real estate buyers to buy time until a more permanent form of financing becomes available. For the business applying for long-term financing, it can bridge the gap between the need for capital and the eventual approval and funding of a loan. For businesses anticipating a capital investment, it can provide the working capital needed in the mean time. For real estate investors, it can buy time to renovate or modify a property so it can be resold for a greater value. Homebuyers can use bridge loans to enable them to buy a new home before their existing home has sold.