How to Structure Financing During Bankruptcy Proceedings
A company's ability to keep operating even while under bankruptcy protection often depends on the existence of a new source of financing; the terms of that financing are usually among the most contested issues in the process.
The purpose of debtor-in-possession financing
Financing during a bankruptcy process (DIP financing) is provided so the company can keep paying its suppliers, keep paying employees, and continue its core operations.
Without this financing, the company's operations can stop abruptly, which can sharply reduce both going-concern value and the recovery rate for all creditors.
Negotiating priority status
The party providing DIP financing typically demands a priority status that ranks ahead of all existing claims, superpriority, which may require the consent of existing secured creditors.
Existing senior lenders are under no obligation to accept this priority; that's why structuring DIP financing usually requires a separate negotiation process with existing creditors.
Choosing the source of financing
DIP financing is sometimes provided by the existing senior lender, sometimes by a new private equity or private credit investor; in either case, the party providing the financing can end up with a strong control position by the end of the process.
A new investor providing DIP financing is usually read as a signal of that investor's intent to acquire the company post-bankruptcy.
Budget and spending controls
DIP financing is almost always tied to a detailed weekly or monthly cash budget; the company may need the financing provider's approval for any deviation from that budget.
This control mechanism limits the financing provider's risk, but it also meaningfully narrows management's operational flexibility.
Its link to the exit strategy
The tenor of DIP financing is usually set against the expected length of the bankruptcy process, and it is typically planned to convert into permanent financing or a sale by the process's end.
For that reason, DIP financing should be designed not as a standalone rescue tool but as the first stage of the ultimate exit strategy.
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Learn moreFrequently asked questions
Is DIP financing required in every bankruptcy process?
No; if the company has sufficient cash or operating income, the process can proceed without DIP financing, though this is rare in large-scale cases.
Who can provide DIP financing?
Existing lenders, private credit funds, private equity investors, or in some cases a strategic buyer.
What does superpriority status mean?
It means the DIP financing provider's claim will be repaid even ahead of existing secured claims; this status generally requires court approval.
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