Most companies go through peaks and valleys, with the peaks hopefully lasting longer than any downturns. When a rough spot turns into a longer decline, however, it may be time for a company to access turnaround financing.
Turnaround financing is used to help companies improve their cash flow while maintaining operations. Many companies need turnaround financing to get through an earnings slump, unexpected obstacle, or other unusual circumstance such as the COVID-19 pandemic.
Often turnaround financing is used to weather a quick storm and get the company back on its feet. Other times, the downturn becomes more long-lasting, and the company must move into bankruptcy. There are three types of business bankruptcy solutions: Chapter 7, Chapter 13, and Chapter 11. While Chapter 7 is focused on liquidation, and Chapter 13 is more about helping individual sole proprietorships, Chapter 11 bankruptcy helps businesses survive long-term, by shielding themselves from creditors while reorganizing and managing their debts and assets.
Bankruptcy in Chapter 11 often requires specialized alternative financing to help maintain cash flow and keep the company afloat while other measures, like expense reduction, take place. When Chapter 11 is the chosen path, a specific Debtor-in-Possession (DIP) financing structure may be warranted.
DIP financing can help companies in Chapter 11 move forward, with the long-term goal of enhancing cash flow for long-term recovery. This recovery can occur more quickly and smoothly when companies seek help early from an alternative lender for cash flow assistance.
Financing a company in Chapter 11 has special requirements, and a DIP lender needs approval from the bankruptcy court to help the company recover. This approved lender retains the first lien on company assets, while providing a term loan to simultaneously improve cash flow. Often, the lender also works with turnaround specialists such as interim CFOs to successfully navigate the company out of troubled waters. The role of a DIP lender is a unique and specialized one, and the selection of the right lender can make a significant difference in the ultimate health of the company’s viability.
Turnaround situations often require alternative financing to help clients move through a difficult period. When a Debtor-in-Possession (DIP) structure is warranted, it’s ideal to use an experienced lender who knows how to navigate the unique structures involved.
DIP Financing can help workout solutions go smoother, with faster payoffs. DIPs can also help avoid bank non-accruals and charge-offs, which smooths the transition for companies. With DIPs, companies can bypass covenants while achieving an important step in their turnaround story.
Q: How do companies typically exit Chapter 11 filings?
A: Because companies are shielded from creditors with Chapter 11, they can take the time needed to pay down debts, reduce expenses, and renegotiate for better terms. Once they are healthier, usually within a few years, they can be released from Chapter 11 bankruptcy status.
Q: Can DIP financing successfully bring a company out of Chapter 11?
A: Yes, DIP financing helps companies manage and reorganize their debts and assets, all while continuing to operate their business as usual.
Q: What is the difference between Chapter 7 and Chapter 11 bankruptcy?
A: The main difference is liquidation — in Chapter 7 bankruptcy, assets are liquidated, while in Chapter 11 bankruptcy, they are typically restructured.
Q: Are Chapter 11 filings expected to increase, as a result of the pandemic?
A: Many companies will likely file for Chapter 11 throughout 2021 and beyond, as a result of COVID-19 related issues such as institutional balance sheet clean-ups, the ending of forbearances and moratoriums, and the conclusion of government stimulus infusions.
LSQ has helped dozens of companies successfully recover from a turnaround or bankruptcy situation. For more than 25 years, LSQ has been helping companies meet their working capital needs. To learn more about how we can help your business do the same, visit https://lsq.com/platform/accounts-receivable/. If you are ready to have a conversation, visit lsq.com/contact.