What is a dip loan?

4th Dec 2009 by Tom Lindmark

A DIP loan is a loan made to company that is undergoing reorganization under Chapter 11 of the Federal Bankruptcy Code. DIP stands for Debtor In Possession which means that the company undergoing bankruptcy, the debtor, still retains possession of the assets and liabilities of the business under the supervision of the bankruptcy courts. Since a company in bankruptcy by definition doesn't have enough cash flow to continue business without assistance from the courts it needs new loans to get back on its feet. This is what gives rise to a DIP loan. A new lender comes in and with the approval of the court extends a line of credit to provide a new source of cash flow while the company negotiates the terms of the bankruptcy and its discharge with existing creditors. A DIP lender is given first claim on specified assets of the company so done properly it is a very safe loan. It is also a very complicated loan to arrange and if not done right can be a disaster for the DIP lender.

This answer is the subjective opinion of the writer and not of FinancialAdvisory.com