DIP financing — Debtor-in-Possession financing — is specialized credit extended to companies in Chapter 11 bankruptcy, allowing them to operate while reorganizing, with super-priority repayment status.
At CRAGSI, we define DIP financing (Debtor-in-Possession financing) as a specialized form of credit extended to a company that has filed for Chapter 11 bankruptcy protection. DIP financing allows a company to fund its operations during the reorganization process — paying employees, purchasing inventory, and maintaining business relationships — while it works toward a plan of reorganization or going-concern sale.
DIP lenders typically receive super-priority claims, meaning they are repaid before virtually all pre-petition creditors. Courts must approve DIP facilities, providing lenders with significant protections and explaining why DIP financing is generally available even to deeply distressed borrowers.
DIP loans can take many forms: revolving credit facilities, term loans, or combinations. They may be provided by existing lenders (known as "roll-up" DIPs) or by new lenders. Terms — interest rates, fees, covenants, and milestones — are negotiated under intense time pressure and require sophisticated counsel on both sides.
A well-structured DIP facility provides the runway necessary to achieve a successful reorganization or sale; a poorly structured one can accelerate liquidation by imposing unachievable milestones or stripping management of operational flexibility.
Related CRAGSI service: Turnarounds & Restructurings