Debtor-in-Possession Financing

Debtor-in-possession financing, usually shortened to DIP financing, is funding for a debtor that continues operating after entering US Chapter 11, where the company remains in possession of its assets and manages the business subject to bankruptcy rules and court oversight. It may need new cash to pay wages, buy stock and preserve value while a restructuring plan is developed, and similar rescue funding mechanisms exist elsewhere, though their names and legal priorities differ.

The first question is why existing cash is insufficient, for example when a debtor has receivables due later but suppliers demand immediate payment. The debtor should prepare a short-term cash forecast showing payroll, critical vendors, collections and required spending, because a lender will want to know how the money will be used and repaid, and a court will scrutinise the proposal in the applicable process.

US Bankruptcy Code section 364 sets out paths for obtaining credit after a filing, and the priority and security available depend on the circumstances and required approvals. DIP financing can provide time for an orderly restructuring, but time is not a result, so it should be tied to an executable plan, transparent cash reporting and terms that the court and stakeholders can evaluate.

New financing is not always senior to every existing creditor, as a superpriority administrative claim, a lien on unencumbered assets or a priming lien over an existing security interest involve different protections and conditions. A priming lien can affect an existing secured lender, so the legal test and adequate protection requirements are important.

The debtor cannot simply promise another lender the first claim on already-pledged collateral because cash is urgently needed, since existing creditors may object and the court may reject or change terms, so the proposed collateral and priority should be explained carefully rather than using the word "priority" as if it settled everything. A financing package can contain a revolving line, a term loan or both, and it may refinance part of an existing lender's debt, fund operations and provide letters of credit.

The borrower may pay fees, interest and professional costs, and covenants and a strict budget can give the lender substantial influence over the restructuring timetable, so ask how the budget allocates money and what milestones the lender can enforce, since information rights, default triggers and sale deadlines can matter as much as the headline amount. The cheapest nominal interest rate is not necessarily the cheapest or safest package.

Cash runway is a rough planning measure: a $6,000,000 facility divided by a steady monthly cash burn of $1,000,000 suggests six months. In reality, the facility may not all be drawable on day one, collections can change and restructuring costs can spike, so a weekly receipts-and-payments forecast and a downside case should be built.

A six-month arithmetic result is not a promise of six months of safe trading, and creditors care about what remains for them, since funding may preserve going-concern value and improve eventual recoveries, yet expensive or heavily secured debt can consume value if the plan fails. The court process needs disclosure, as financing motions and orders identify terms, liens, priority and any effect on existing claims, and a lender's commitment may be conditional on approval, due diligence and closing steps.

Do not tell suppliers that the money has arrived merely because a term sheet was signed, and should verify the effective order and actual availability of funds, determining how much cash is truly available, who ranks where and what happens if the plan fails before treating a facility as a lifeline. The term does not transfer unchanged to the UAE, where Federal Decree-Law Number 51 of 2023 establishes a financial restructuring and bankruptcy framework with provisions for new funding under its own conditions and court process, so a UAE facility should not be described as an automatic US-style DIP loan or as guaranteeing that all new money will outrank all older claims.