When you file for a debt reorganization bankruptcy, you may believe that you no longer will be able to secure financing until your case is discharged by the court. You also may believe that lenders will deem your business not creditworthy and therefore ineligible for any type of loan or funding.
However, you may still be able to secure asset based financing even while your bankruptcy case remains open in court. Before you seek out funding based on your assets, you should understand how your case may affect this transaction and for what purpose this cash can be used.
Assets Used for Financing
You probably filed bankruptcy to reorganize your company's unsecured debt. The court may not have any desire to put a hold on assets like your accounts receivable or your inventory to pay off the creditors and loans listed in your case.
If the court permits, you can then use your unpaid invoices or your business' inventory to secure asset based funding. Your lender will decide how much money you can receive for these assets by using a dilution and an advance rate to determine their value. In theory, asset based lenders typically advance more money for accounts receivable than they do financing based on inventory.
The dilution rate includes variables such as:
- Bad debts or invoices that have not been paid by your clients
- Any discounts you gave to clients for paying their obligations early
- Products that have been returned by the customer
The advance rate is determined by doubling this dilution rate and then adding five percent. That number then indicates to the lender how much your assets are worth and how much money it can safely advance to you.
Asset Based Funding and Bankruptcy
Before any financing can be extended to you, the entire transaction must meet the approval of the court and the judge overseeing your case. If the judge agrees, you can be issued financing that typically is known as a DIP loan, or debtor-in-process funding.
In fact, asset based lenders may find you to be more of an attractive prospect during bankruptcy for this type of transaction because they know all of your previous creditors will be held at bay by the court. These creditors cannot make any demand on your accounts receivable, inventory, or other qualifying assets for payment on those debts. These assets are virtually guaranteed by your case to be available to the new lenders who extend you asset based financing.
Uses for Asset Based Loans during Bankruptcy
Despite your company being involved in an active bankruptcy case, you still need money to keep forging ahead with your business' future. Expenses do not stop occurring simply because you are restructuring your old debt.
With that, you can use your asset based funding to take care of obligations such as:
- Company growth and reaching new markets and clients
- Equipment and inventory purchases
- Surviving sales slumps and slow business seasons
- Acquisitions or merging with other companies
- Paying everyday expenses like payroll, utilities, and insurance
- Improving your business' credit rating
While you may have to provide an accounting to the court for how you used this cash, these purposes are generally approved by bankruptcy trustees and judges. These purposes also allow you to keep your company afloat until your existing debts are reorganized.
Unlike individual bankruptcies, Chapter 11 reorganization bankruptcy still allows you some leeway when it comes to securing funding for your business. You can get cash that you need to continue your business and still meet the terms of your case by using asset based financing.