Understanding DIP Financing: A Lifeline for Distressed Companies

Jun 02, 2025·By Asher Goldmann

As economic tides shift, DIP financing emerges as a beacon of hope for businesses navigating the stormy waters of financial distress. In recent years, companies have faced unprecedented challenges, reminding us that bankruptcy is not the only option when obligations become overwhelming.

What is DIP Financing?

DIP financing, or Debtor-in-Possession financing, is a specialized loan available to companies undergoing Chapter 11 bankruptcy. This financial tool allows businesses to continue operations while restructuring their debts, rather than liquidating assets. Essentially, it provides a lifeline for companies to stabilize their financial situation and work towards recovery.

How Does a Company Secure DIP Financing?

So, how does a struggling business actually get its hands on this crucial DIP financing? The process isn’t as simple as walking into a bank and asking for a loan—especially when bankruptcy is already in play.

First, the company must formally request permission from the bankruptcy court to take on new debt. This isn’t just a rubber-stamp affair; the court closely examines whether the business truly needs extra working capital to keep the lights on and pay suppliers, or if a plan for turning things around is in motion.

Before any funds are released, the business needs to present a detailed recovery strategy. Both the court and potential lenders want to see a clear path to profitability—not just hopeful thinking. Lenders are particularly cautious and will usually require that the loan is secured by the company’s assets. On top of that, DIP financing often comes with “super-priority” status, meaning these lenders get paid back before anyone else, including existing creditors and shareholders.

The court, for its part, stays closely involved. It not only approves the financing plan but also oversees the ongoing relationship between the company and its lenders. If everything checks out and the plan is approved, the business gains immediate access to much-needed liquidity, giving both the company and its creditors a fighting chance at a better outcome than liquidation.

Why “Super-Priority” Matters for DIP Lenders

One of the most crucial features of DIP financing is what’s known as “super-priority” status. This isn’t just financial jargon—it’s what makes DIP loans so attractive to lenders when a company is in dire straits.

With this super-priority, DIP lenders leapfrog over existing creditors and shareholders in the repayment hierarchy. If the company’s restructuring doesn’t pan out and assets need to be liquidated, DIP lenders are at the very front of the line to be repaid. In practical terms, their claims must be satisfied before nearly anyone else, including previous secured lenders. This gives lenders a strong incentive to inject fresh capital into a struggling business, knowing that their risk is mitigated.

The court also typically grants other protective measures at the outset—such as an approved operating budget and, quite often, higher interest rates—to give DIP lenders additional confidence. Of course, the existing creditors have a say, but often must agree to step aside in terms of priorities if the company is to survive and potentially recover.

This unique position is reserved only for companies that have filed for Chapter 11 protection, reflecting the balancing act between a distressed company’s need for new funds and creditors’ rights in a bankruptcy proceeding.

Who Provides DIP Financing?

DIP financing typically comes from a range of sources, including major banks, private equity firms, hedge funds, or syndicates composed of multiple lenders joining forces. Sometimes, a single financial institution may step up to provide the entire loan, while in other cases, several lenders collaborate to spread the risk and pool their resources. The exact makeup depends on the size of the financing needed and the specifics of the company’s restructuring plan.

Types of DIP Financing

There’s no one-size-fits-all approach when it comes to DIP financing. Companies in distress can tap into several forms, each tailored to their unique cash flow needs and business circumstances:

Term Loans: The most common route, these loans provide a lump sum of cash upfront—think of it as a significant financial shot in the arm to cover immediate expenses or implement big changes in operations.

Lines of Credit: Need flexibility? A line of credit works much like a business credit card. Companies can borrow funds up to a pre-set limit as needs arise, paying interest only on the amount drawn—not on the total approved balance.

Invoice Factoring: For businesses with outstanding customer invoices, invoice factoring lets them convert future payments into immediate working capital. Rather than waiting for clients to pay, the company sells its receivables (often at a discount) to get quick cash in hand.
Each method has its place, allowing businesses to choose what best supports their turnaround strategy.

What Do Lenders Require Before Providing DIP Financing?

Securing DIP financing isn’t as simple as asking nicely—lenders expect companies to show they have a viable path forward. Before extending these critical funds, lenders typically require a comprehensive restructuring plan that demonstrates how the business intends to return to profitability.

But that’s not all. To protect their investment, lenders demand collateral, often securing the loan against the company’s most valuable assets. DIP financing is also structured to take priority over other debts, meaning these lenders move to the front of the repayment line, ahead of previous creditors and shareholders. This combination of solid business strategy and robust guarantees gives lenders the confidence to support struggling companies through turbulent times.

DIP Financing vs. Exit Financing: Key Differences

At this point, you might be wondering how DIP financing stacks up against another common term in bankruptcy circles: exit financing.

While DIP financing supports a company during the bankruptcy process—keeping the lights on and day-to-day operations running—exit financing steps in at the finish line. Exit financing provides fresh capital once a business is ready to emerge from bankruptcy, ensuring it can meet post-restructuring obligations and move forward with a clean slate. In short:

DIP financing: Helps companies operate while in Chapter 11 bankruptcy.

Exit financing: Fuels the business as it leaves court protection and re-enters regular operations.

Both play crucial—but distinct—roles in a company’s journey through and out of financial distress.

Key Terms in a DIP Financing Agreement

Now, let's peel back the curtain on what actually goes into a DIP financing agreement. While this funding can be a lifeline, it's far from a casual handshake—there are deal terms galore, and each plays a critical role in the company’s path through bankruptcy.

Seniority and Lender Protections

DIP loans almost always come with top billing when it comes to repayment—lenders get “super-priority” status on company assets. This means, if all else fails and the company is forced to liquidate, the DIP lender gets paid before existing creditors. Of course, this arrangement must pass muster with the bankruptcy court, and existing lenders often have to sign off—even as they watch their claims take a backseat.

The Importance of an Authorized Budget

Another major piece of the puzzle is the so-called “DIP budget.” This isn’t your usual back-of-the-napkin projection—think of it as a detailed roadmap. It forecasts all incoming and outgoing cash, including everything from payroll and vendor payments to legal fees and one-off expenses like seasonal costs. Both the company and the lender need to agree on this budget up front, as it helps set the size and structure of the loan.

Structure: Term Loans vs. Revolving Credit

When it comes to how DIP financing is delivered, there are two common flavors:

Term Loans: These are typically lump-sum loans, funded at once and intended to last through the bankruptcy process. Since they lock in a set amount (often for a year or more), borrowers end up paying higher interest over the life of the loan.

Revolving Credit Facilities: Once more widespread, these work more like a credit card—borrowers can draw, repay, and redraw funds as needed. This flexibility helps companies manage cash wisely, and may keep interest costs down compared to term loans.

Both approaches are negotiated as part of the overall agreement, depending on what fits the company’s situation best.

Can Multiple Lenders Participate in DIP Financing?

Absolutely—DIP financing isn’t limited to a single lender stepping in to help. While a major bank or financial institution may provide the funding on its own, it’s also common for groups of lenders to join forces and share the risk. This syndication approach allows several banks or specialized lenders—think Global Capital Funding, JPMorgan Chase, Wells Fargo, or even hedge funds like Apollo Global Management—to collectively offer the financing package. By pooling resources, these lenders can support larger restructurings and provide the distressed company with the substantial capital it needs to weather the bankruptcy process.

What Types of Loans Are Used in DIP Financing?

DIP financing typically comes in two main flavors: term loans and revolving credit facilities.

Term loans are common, providing the full amount upfront and usually spanning a year or more. This structure ensures businesses have immediate access to the capital they need throughout bankruptcy proceedings—though it often comes with higher interest costs due to the total sum being borrowed from day one.

In contrast, revolving credit facilities function much like a corporate credit card. Companies can borrow, repay, and then borrow again, offering much-needed flexibility during uncertain times. This option helps keep interest expenses in check, as interest accrues only on the outstanding balance, not the entire credit limit.

Both term and revolving structures play a crucial role in keeping companies afloat while they reorganize under the watchful eyes of bankruptcy courts.

Seniority: What It Means for DIP Financing

Seniority, in the context of DIP financing, refers to the privileged standing that these loans receive during bankruptcy proceedings. Unlike ordinary business loans, DIP financing is granted a special status by the bankruptcy court. This means that if the company ultimately fails and must liquidate its assets, DIP lenders are paid back before most other creditors—even those who previously held secured positions.

This priority status is crucial. It gives lenders extra reassurance that their investment stands at the front of the line for repayment. To further sweeten the deal, courts often approve favorable terms for DIP loans, such as higher interest rates or special protections. However, for this to work, existing lenders usually need to consent, as their claims may be pushed further down the repayment order.

In this way, seniority is about more than just order—it’s what makes DIP financing attractive to lenders willing to step in when a company needs help the most.

Term Loans vs. Revolving Credit in DIP Financing

When it comes to DIP financing, not all loans are created equal. Two of the most common structures—term loans and revolving credit facilities—offer distinct advantages (and drawbacks) depending on a company’s financial strategy.

Term loans are typically disbursed in full at the outset of the bankruptcy proceedings. This means the business receives a lump sum upfront, which can be a double-edged sword: while it ensures immediate access to funds, it also locks the borrower into paying interest on the entire amount—often for longer than a single year.

On the other hand, revolving credit facilities function more like a credit card. Here, businesses can draw only what they need, when they need it, and pay it back at their own pace. This flexibility allows companies to better manage cash flow and potentially minimize interest costs, since they’re only charged for the amount they actually use.

While term loans have become more prevalent in recent years—especially in large, high-profile bankruptcies—revolving credit was once the go-to solution for many distressed companies looking to maintain maximum flexibility during uncertain times.

The Role of DIP Financing in Bankruptcy

When companies like General Motors and Chrysler filed for bankruptcy in 2009, they turned to DIP financing to facilitate their restructuring efforts. This unique financing arrangement not only helps maintain operations but also reassures creditors that they may receive a better return than if the company were to liquidate its assets.

For instance, General Motors secured a staggering $33 billion in DIP financing, enabling them to continue operations while reorganizing. Similarly, Chrysler received $4.1 billion to aid in their restructuring...

The Role of DIP Financing in Bankruptcy

How DIP Financing Helps Creditors Recover More

One of the main reasons DIP financing is such a valuable tool in bankruptcy is its role in protecting creditor interests. Rather than forcing a distressed company into a quick liquidation—often resulting in assets being sold for pennies on the dollar—DIP financing injects the necessary capital to keep the business operational during the restructuring process.

Keeping the lights on allows the company to:

Maintain its revenue-generating activities
Preserve valuable assets and customer relationships
Execute a thoughtful turnaround plan

With this breathing room, the business has a better chance to recover, sometimes even exiting bankruptcy altogether. This maximizes the value of the business for everyone involved. For creditors, this means a much higher likelihood of recouping what they are owed, as the company’s assets can be preserved and the repayment of debts can be scheduled in an orderly, strategic fashion—rather than at the mercy of bargain-bin liquidation prices.

How DIP Financing Is Negotiated and Secured

Securing DIP financing isn’t as simple as walking into a bank and walking out with a suitcase of cash. The process is a blend of rigorous planning, legal oversight, and delicate negotiation—a bit like convincing both your parents and your bank that you really do need a loan for that quirky business idea, but with higher stakes.

Here’s what goes into locking in DIP financing:

Court Approval is Key: First, the company must petition the bankruptcy court to access new funds. The court acts as a watchdog, making sure the business isn’t just asking for a financial band-aid but actually has a roadmap to recovery. This means presenting a solid, detailed turnaround plan.

Lender Due Diligence: Lenders aren’t in this for charity. They want to see convincing evidence that the company can right the ship and, crucially, that there’s a viable strategy for future profitability. Lenders typically demand collateral and require their loans to be repaid before almost any other debts—think “front of the line” status.

Priority and Protection: DIP loans are usually fully secured against the company’s assets and come with “superpriority” repayment status. This means, in the unfortunate event of a liquidation, the DIP lender gets repaid before other creditors—even those who’ve been in line longer.

Budget Negotiation: One of the most important steps is hammering out the so-called “DIP budget.” This detailed forecast outlines cash inflows, expenses, vendor payments, professional fees, seasonality, and capital needs—essentially, a financial roadmap for the next several months. Both the company and the lender must agree on its framework.

Lender and Court Oversight: Once terms are finalized, the lender’s actions and the overall use of funds remain under court supervision. This ensures both transparency and adherence to the recovery plan, safeguarding the interests of creditors and the company itself.
In short, DIP financing is a collaborative process, requiring alignment between the company, the bankruptcy court, and potential lenders, all moving toward a common goal—breathing new life into a distressed business.

How Is an Authorized Budget Created and Used in DIP Financing?

One key element of DIP financing is the creation of an “authorized budget”—a financial roadmap charted early in the process. This budget typically covers projected receipts, expenses, cash flow, and timing of outflows across rolling periods. Think of it as the backbone for both borrower and lender, offering a forecast that takes into account everything from vendor payments and legal fees to seasonal swings in revenue and upcoming capital needs.

Both the distressed company and the lender spend considerable time negotiating the scope and detail of the budget before any funds change hands. Once agreed upon, this budget isn’t just filed away—it dictates the structure and limits of the loan facility itself. The company must stick to this agreed spending plan, with regular reporting required to ensure all parties stay aligned. This careful budgeting is what helps keep operations running smoothly while the company works toward brighter days.

Recent Changes in DIP Financing

The landscape of DIP financing has evolved, reflecting recent industry changes and new regulations. Companies now face stricter oversight from the courts, ensuring that the restructuring process is viable and beneficial for all stakeholders involved. These changes emphasize the importance of transparency and accountability in the use of DIP financing.

Why Consider DIP Financing?

For businesses grappling with financial difficulties, DIP financing offers several advantages:

Preservation of Business Operations: Companies can continue functioning while restructuring, maintaining relationships with customers and suppliers.
Potential for Higher Returns for Creditors: Creditors may receive better returns through restructured operations than through asset liquidation.
Access to Capital: DIP financing provides the necessary funds to stabilize and reorganize the business.

Weighing the Risks and Costs of DIP Financing

While DIP financing offers crucial support for struggling companies, it’s important to consider the associated costs and risks before jumping in. One of the biggest factors to watch for is the interest rate—DIP loans often come with significantly higher rates compared to conventional business loans. This is largely because lenders face greater risk when providing funds to companies in bankruptcy, and they price that risk accordingly.

These days, term loans have become the most common structure for DIP financing. Unlike the revolving credit lines that were popular in the past (think of them as credit cards for businesses, allowing more flexibility to borrow and repay as needed), term loans provide the entire funding amount upfront, which companies use throughout their bankruptcy process. While this guarantees access to funds, it often translates to higher costs: borrowers are typically on the hook for the full interest charges, regardless of how much of the loan they end up using.

The shift away from revolving credit facilities means less flexibility for companies to manage cash flows and minimize interest expenses. With a term loan structure, every dollar borrowed is usually subject to interest from day one, which can add up quickly for a business already facing cash crunches. Businesses need to weigh the immediate lifeline DIP financing provides against the reality of higher long-term costs and evaluate whether the benefits justify the expense.

Conclusion

In today’s volatile economic environment, DIP financing serves as a crucial alternative for companies facing bankruptcy. It offers a unique opportunity for businesses to restructure and emerge stronger. If you find yourself in a similar situation, explore the potential of DIP financing as a way to navigate financial distress and secure a brighter future.

Are you ready to take the next step? Contact us today to learn how we can assist you with your DIP financing needs and help your business thrive once again!