DIP financing, or debtor-in-possession financing, helps companies that are going through bankruptcy proceedings continue to operate and possibly rebound. Many companies turn to asset-based lenders and use their assets (equipment, accounts receivables, inventory) to secure loans. Having DIP financing lined up before your business begins to have a negative cash flow is crucial; you are more likely to transition out of bankruptcy by planning for this contingency ahead of time.

The number of bankruptcies in the U.S. is up after nearly a decade of declining Chapter 11 filings. Today, companies are preparing for economic swings and how they will affect their business's stability and productivity--and whether they will survive. Because asset-based lenders are better suited to helping companies through tough times than traditional lenders, businesses choose them for DIP financing.

Collateral and DIP Financing

Most DIP loans are collateral-based; that is, a company pledges its assets as collateral to secure financing. Lenders that specialize in asset-based loans are the best at assessing the value of assets, and are familiar with the entire bankruptcy cycle. If and when a company needs to file for bankruptcy, asset-based loans can help them restructure instead of throwing in the towel by liquidating all their assets.

Debtor-in-possession financing through an asset-based lender has other advantages over borrowing from a bank also. For one, these loans are revolving: you can continue to borrow against collateral and repay the loans on a less restrictive schedule than a bank's. Plus, since there are many smaller loans, they reflect your company's current economic status and needs better than a lump sum loan.