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Financing a business restructure is one of many reasons a business may need to supplement their finances. Restructuring is usually considered when a business goes through a period of constrained cash flow. This could be as a result of losing a significant customer, investing in the wrong markets or who would have thought; a global pandemic even.
A restructure involves rearranging certain parts of the businesses’ operations to achieve greater efficiencies and increase profitability. It’s not always undertaken because a business has financial pressures but when it is, a restructure may require disposing of assets and dealing with unprofitable elements to try and regain some control over finances before it’s too late.
Whether informal or formal, a restructure requires some level of assistance from professionals such as insolvency practitioners and specialized lenders with experience in financing a restructure. In a situation where the business is in significant financial distress, there could be little option but to file for insolvency. Surprisingly however, this still does not preclude a business from obtaining finance.
When a business files for chapter 11 bankruptcy in the US or proceeds to make a proposal or submits a notice of intention (NOI) to make a proposal under the Canadian Bankruptcy and Insolvency Act (BIA), this is often the first stage of a formal business restructuring process which gives a company the opportunity to rectify it’s financial situation and come up with a plan to repay its creditors. As part of this process, a company may be able to secure Debtor-in-Possession (DIP) financing to continue operating.
Debtor-in-Possession (DIP) financing is a special form of finance provided for companies in financial distress, typically during restructuring under corporate bankruptcy law. A DIP facility allows the business to carry on operating by providing short-term liquidity while operating under bankruptcy protection. This cash usually comes at a pivotal point, when it is needed most urgently to pay suppliers who may now be demanding payment on delivery. Without the finance, a business would not be able to service its customers and maintain revenue whilst going through a restructure.
As assets are generally worth more to a functioning business than in a bankruptcy situation, accessing DIP finance is beneficial for the business and its creditors to avoid the negative effects of full bankruptcy. As the debtor-in-possession (the business) still owns its assets under this arrangement, they can dispose of or lease assets and property in the best interests of their creditors.
DIP financing is agreed and put in place via a court order. In and the United States, each application or petition for DIP finance must be made to the courts and a decision will be made on a case-by-case basis as to whether the financing will be awarded. If it is agreed, then the DIP lender is awarded a special charge on the business’ assets, over and above its other, existing creditors which provides the lender assurance that they get priority charges over all property.
It’s also important to note that in Canada, an application for this type of finance can also be made while a company is undergoing a reorganization under the Company Creditors Arrangement Act’(CCAA).
In essence, yes depending on the company and type of bankruptcy filed. It isn’t an easy process however and won’t be suited to every situation. There are many successful companies that have gone on to succeed after filing for bankruptcy and they re-emerge stronger and more profitable than they were previously. It’s hard to believe that Apple, the giant of technology, was once really close to filing and General Motors did file for bankruptcy following the 2008 global downturn but was able to repay all the funds loaned to them in around 5 years. Bankruptcy doesn’t have to mean the end of a company with the right team of professionals in place to formulate a solid turnaround strategy. DIP financing can be complex and due to the urgent nature of a bankruptcy situation, financing will often need to be put in place swiftly; you’ll therefore need a lender with extensive experience in DIP financing.
The Sallyport team have decades of experience and expertise in providing DIP and exit financing to nurture businesses through a challenging phase. Once the business is in a better position, our aim is to transition you towards a more conventional finance product which will allow you to reach the next landmark in your business’s growth.
When done correctly, a debtor-in-possession facility is an effective way to turn around a business and ensure that the business can retain employees and customers, benefiting the business owners, creditors and the wider economy.
Reach out to our professionals with any questions you might have on the financial options open to you and your particular situation.
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