It’s a known fact that companies that obtain bankruptcy financing have a much higher chance of emerging out of chapter 11 as a viable company than those that don’t secure debtor in possession funding. However, getting DIP financing has always been a challenge. There is the obvious reason that insolvent companies can be risky investments for commercial funding companies, so not many offer the product. And for the most part, DIP financing has only been offered by banks and finance companies to large companies. Because of this, many small and medium sized businesses were never able to obtain funds and went out of business.
Recently, the trend has been reversing and a growing number of finance companies have begun offering specialized forms of bankruptcy financing to small and medium sized companies. Although still not widely available, a number of small businesses have been able to secure DIP financing and emerge from bankruptcy.
One of the bigger challenges that bankrupt companies have is that they lose control of all their bank accounts as soon as they declare for bankruptcy. Most assets up to the point of filing for bankruptcy have to be used to satisfy past debts. If your customers take 30 to 60 days to pay their invoices, that means that you may have to go without much liquidity for a number of weeks, unable to pay employees or buy new supplies. Factoring financing is a form of DIP financing that can help in these situations. Factoring accounts receivable provides you with an immediate advance on your slow paying invoices, supplying the needed funds to pay employees and suppliers. Factoring receivables provides you with the liquidity and breathing room to run your business while you navigate the chapter 11 bankruptcy process.
Qualifying for factoring is relatively easy. The biggest requirement that factoring companies have is that you sell products/services to credit worthy commercial customers who pay in less than 90 days. Factoring works best if your customers pay in 30 to 45 days and if your profit margins are at least 15%, but is flexible enough to work in other situations.
One substantial advantage of accounts receivable factoring is that is readily available to small and midsized companies. Like any form of debtor in possession (DIP) financing it will need to be approved by the court. And, it is best to apply for DIP financing and bankruptcy at the same time since it will give you a better footing on the critical weeks immediately following a bankruptcy.
About Commercial Capital LLC
Marco Terry is Managing Director of Commercial Capital LLC, a leading DIP financing company. To learn more about its debtor in possession financing program or corporate bankruptcy financing program, please call (877) 300 3258.
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