The number one worry for managers and owners of companies undergoing a chapter 11 bankruptcy restructuring is: will my business survive? Of course they do have many other worries such as meeting with creditors, creating a turnaround plan, paying employees on time and working with suppliers. One way to ensure the success of the restructuring and the survival of the company is to obtain bankruptcy financing, also known as debtor in possession financing.

DIP financing can help provide the capital liquidity to pay operational costs while the company looks to turnaround the current situation. The problem is that unfortunately, few institutions offer business financing to bankrupt companies. If getting a business loan under normal circumstances is hard, looking for business loans while going through bankruptcy is close to impossible. So, what alternatives are there for medium sized companies?

Factoring financing, also known as invoice factoring, is a viable alternative for debtor in possession financing, especially for small and midsized companies. It solves a very specific problem. Companies that sell to other businesses usually have to wait 30 to 45 days to get paid on their invoices. This can create a serious liquidity problem for companies facing insolvency. Accounts receivable factoring advances funds on these slow paying invoices, providing the necessary capital to operate the business.

A factoring company will usually advance about 80% of your outstanding accounts receivable within one business day of invoicing. The remainder 20%, less the financing fee is advanced once the invoice is actually paid for. Factoring companies will also help you evaluate new customers to determine if they are credit worthy. And of course, if you decide to factor new customers, you won’t need to worry about waiting 30 to 60 days to get paid either.

Obtaining factoring financing is fairly straight forward. The biggest requirement is that you must do business with credit worthy companies. Aside from that, you must have a reorganization plan that brings your company back to solvency. And lastly, the court will need to approve the financing relationship.

Going through a chapter 11 bankruptcy is a harrowing experience for business owners. There is the uncertainty of survival. Facing creditors and vendors. Dealing with the possibility of layoffs. And despite all, one has to press forward and try to save the business.

Getting out of a chapter 11 bankruptcy can be very difficult. More often than not, the only way to succeed is by getting as special type of bankruptcy financing called debtor in possession (DIP) financing. Companies that have debtor in possession financing have a better chance of success than those that don’t. However, qualifying for DIP financing is very hard.

Generally speaking, banks don’t offer business financing to bankrupt companies. This will rule out business loans as an option. However there is a specialized type of financing that under many circumstances works better than a business loan. This alternative is called factoring, and it’s been gaining traction as a DIP financing solution. Factoring is available to companies that sell products and services to other businesses or government agencies.

Let’s look at a common business problem. Most business clients pay their invoices 30 to 45 days after buying a product or service. In the meantime, while you wait to get paid, you still need to pay employees and suppliers. This is challenging under normal circumstances and can be impossible for companies undergoing a chapter 11 bankruptcy. Invoice factoring fixes this problem.

Factoring invoices provides you with an immediate advance upon invoicing. The advance is usually about 80% of the invoice. This provides you the necessary liquidity to meet current expenses. You get the remaining 20%, less a small fee, once the customer pays the invoice. One clear advantage of accounts receivable factoring is that you can start taking new customers without worrying about their payment habits. This can offer the necessary breathing room to let your company work out its solvency problems.

Factoring financing is relatively easy to qualify for. The biggest requirement is that your company must sell products or services to credit worthy businesses (or government entities) at a profit.

Although not every factoring company offers DIP financing, you will find many factoring companies willing to work with you. As would be expected, the factoring relationship will need to be approved by the court. Also, any secured creditors will have a say in the relationship. However, entering into the factoring relationship should not be too problematic if you can show how your business and its creditors will benefit from it.

I’m often asked, “can I still buy a home if I’ve had a recent

bankruptcy?”. Absolutely! Now, for obvious reasons, you can expect to

pay a higher rate on your mortgage than those who haven’t had a

bankruptcy. You actually have a couple of choices when it comes to

purchasing a home after a bankruptcy. You can get your mortgage through

a non-prime lender, or seek out an FHA Loan. Whichever mortgage lender

type you go with, be prepared to produce an explanation of the

circumstances of the BK, as well as the documentation and schedule of

debtors. You’ll also need to have re-established some credit in most

cases, to show the mortgage lender that you can now handle paying your

bills again. You needn’t be a novelist to write you BK explanation

letter, your mortgage broker can help with that. At our company, it’s

no big deal to help 20-30 people each month at writing their

explanation letter for Bk’s. We know what the mortgage lender is

looking for and what format they like, so relax when it comes to this

part of the loan. They really just want to know what the circumstances

surrounding your BK were, in layman’s terms. There are basically two

kinds of personal bankruptcies that mortgage lenders deal with; Chapter

13, where your debts are reorganized and paid out over time and Chapter

7, where your assets are liquidated. I’m not an attorney, so speak to

your tax advisor about each of these bankruptcies if you’d like

in-depth information about what they mean. You can usually get a home

mortgage in 12 months with a chapter 13 bankruptcy. You can expect to

wait at least 2 years for a chapter 7 bankruptcy. Either way, you can

expect to produce a trustee letter. It’s dis-heartening, but I meet

couples and individuals all the time who have either just filed

bankruptcy, or they have one being discharged and I’m unable to help

until they get a trustee letter, authorizing a home purchase. I hope

this helps you in your mortgage endeavor!

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