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The Power of Factoring in DIP Deals

For those factoring brokers and consultants following the latest economic news, you were served with the news that several large, recognizable companies (with hundreds or thousands of workers) have filed for bankruptcy protection including Bed Bath & Beyond and Vice Media. May’s bankruptcies did not slow down either when just the past week saw eight companies with more than $500 million in liabilities file for Chapter 11 bankruptcy, including five in a single 24-hour stretch, making this the busiest week for chapter 11 filings so far this year. In 2022 the monthly average was just over three filings.  In total, twenty-seven large debtors have filed for bankruptcy so far in 2023 compared to 40 for all of 2022, according to figures compiled by  According to Mark Zandi, chief economist at Moody’s Analytics, bankruptcy filings, especially among large, unprofitable companies, are ramping at a frenzied pace.  Much of this relates to government support drying up, a general cooling of the economy. and of course significant bank failures.

There were about 16,200 bankruptcy filings among all types of companies in U.S. District Courts in 2023’s first quarter, up from 12,200 a year earlier.  Now that interest rates are back to pre-Great Recession levels and COVID pandemic support programs are over, bankruptcies are featuring a fresh “uptick”.  With banks no longer lending, small and mid-size companies may simply running out of time.

The Power of Factoring in DIP Deals

Factoring can play a crucial role in the context of a debtor-in-possession (DIP) situation, which typically arises during bankruptcy proceedings. A debtor-in-possession is a company that continues to operate its business while under Chapter 11 bankruptcy protection in the United States. Here’s why factoring can be important in this scenario:

  1. Access to Working Capital: Factoring allows a DIP company to access working capital quickly. When a company files for Chapter 11 bankruptcy, its ability to obtain traditional loans or lines of credit may be severely limited. Factoring provides a source of immediate cash flow by selling its accounts receivable to a factoring company at a discount.
  2. Improved Liquidity: Factoring can improve the liquidity of the DIP company, enabling it to continue its operations, pay essential bills, and meet payroll requirements. This liquidity is crucial to maintaining the business as a going concern during the reorganization process.
  3. Avoiding Default on Key Obligations: By factoring accounts receivable, a DIP company can avoid defaulting on critical obligations such as supplier payments and essential operating expenses. This prevents disruptions in the supply chain and maintains the trust of key stakeholders.
  4. Accelerated Recovery: Factoring allows the DIP company to accelerate the recovery of funds tied up in unpaid invoices, thereby reducing the risk of these accounts becoming uncollectible over time.
  5. Flexibility: Factoring arrangements can be tailored to the specific needs and circumstances of the DIP company. The company can factor a portion or all of its receivables, and the terms of the factoring agreement can be adjusted to align with its evolving financial situation.
  6. Reduced Financial Strain: Factoring can help reduce the financial strain on the DIP company, which is essential for managing the costs associated with the bankruptcy process, including legal fees, professional fees, and administrative expenses.
  7. Focus on Core Operations: By outsourcing the management and collection of receivables to the factoring company, the DIP company can free up valuable time and resources to concentrate on its core operations and the restructuring process.

It’s important to note that while factoring can provide immediate financial relief to a DIP company, it should be used judiciously and as part of a broader financial strategy. The decision to use factoring should be made in consultation with legal and financial advisors to ensure it aligns with the company’s overall restructuring plan and complies with bankruptcy laws and regulations.


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