When a Texas business is struggling and unable to pay its creditors, it may find itself in bankruptcy. This can be a difficult process to go through, but there are options available to business owners, including Chapter 11 bankruptcy with DIP financing.
Understanding Chapter 11 bankruptcy
Chapter 11 bankruptcy is a type of business bankruptcy that allows companies to reorganize their debts and assets in a way that gives them a better chance of surviving. It is often used by companies that are struggling but still have some hope of recovering. The business owner will work with their creditors to devise a plan to repay their debts over time.
DIP financing in bankruptcy
DIP stands for “debtor in possession.” This type of financing allows businesses to borrow money from creditors to continue operating during the bankruptcy process. The loan is often used to pay for inventory, employee salaries, and other operating expenses.
Approval of the bankruptcy plan
Acquiring DIP financing isn’t something that automatically happens to businesses after filing for Chapter 11. You must come up with a compelling plan that’ll convince the court and your creditors that you’re worth the investment.
If your creditors approve of your reorganization plan, they might provide the funds to help you implement it. However, these loans often come at a higher interest rate and must be secured with an unencumbered asset. In addition, when repaying your debts, your DIP financing lenders will be granted superiority claim status, even above your shareholder.
Keep in mind that not all businesses will be successful in reorganizing their debts in Chapter 11. In some cases, a company may be forced into liquidation instead. Therefore, keenly assessing the unique circumstances of your business may help you decide if this route is the best for you.