DIP Financing and Cash Collateral Budgets in Chapter 11
/On the first day of a Chapter 11 case, most companies need permission to spend money. If a lender has a lien on the company's cash and receivables, that cash is "cash collateral" and cannot be used without the consent of each lender with an interest in it, or a court order. If there is not enough of it, the company needs new money: debtor-in-possession (DIP) financing. Either way, the court approves a budget.
How does debtor-in-possession financing work?
A DIP loan is new financing for a company in Chapter 11, approved by the court. If unsecured credit is not available, the court can grant the lender priority over other administrative expenses or liens on the company's assets. A lien ahead of existing lenders is allowed only if no other credit is available and those lenders are adequately protected (11 U.S.C. § 364). The loan comes with a budget and reporting covenants.
How do I prepare a DIP or cash collateral budget?
Build a 13-week cash forecast by line item: receipts, payroll, suppliers, rent, insurance, taxes, professional fees and U.S. Trustee fees. Add what the filing changes: deposits utilities may demand, suppliers moving to cash-in-advance, and pre-petition payments the court may allow. Show the minimum cash balance each week and how much financing, if any, is needed.
Points that lenders and courts focus on:
- Professional fees are usually shown separately, often with an amount set aside.
- Critical vendor and pre-petition payments appear only if a motion asks the court to allow them.
- Variance limits set how far actual results may differ from the budget before it is a default.
- The first weeks are tested hardest, because interim approval covers only what is needed to avoid immediate and irreparable harm until the final hearing (Rule 4001(b)(2)).
Worked example (illustrative figures, weeks 1–4)
| Week 1 | Week 2 | Week 3 | Week 4 | |
|---|---|---|---|---|
| Collections | 140,000 | 165,000 | 170,000 | 175,000 |
| Payroll and benefits | (90,000) | (10,000) | (90,000) | (10,000) |
| Suppliers (cash in advance) | (70,000) | (75,000) | (70,000) | (70,000) |
| Rent, insurance, utilities deposits | (45,000) | (5,000) | (5,000) | (5,000) |
| Professional fees (escrowed) | (20,000) | (20,000) | (20,000) | (20,000) |
| Adequate protection payment | (15,000) | |||
| Net cash flow | (85,000) | 55,000 | (15,000) | 55,000 |
| Opening cash | 100,000 | 15,000 | 70,000 | 55,000 |
| Ending cash | 15,000 | 70,000 | 55,000 | 110,000 |
Week 1 nearly exhausts cash. That week decides whether cash collateral alone is enough or DIP financing is needed.
What is cash collateral, and what is adequate protection?
Cash collateral is cash and cash equivalents in which a lender has a lien, including collections from pledged receivables and inventory (§ 363(a)). The company can use it only with the consent of each entity with an interest in it, or the court's approval (§ 363(c)(2)). In exchange, the lender gets "adequate protection" against the decline in its collateral: periodic payments, replacement liens on new receivables, or other protection (§ 361). The budget has to show the company can afford it.
Checklist
- 13-week budget by line item, starting from actual bank balances
- Filing effects included: deposits, cash-in-advance suppliers, pre-petition payments sought by motion
- Professional fees and U.S. Trustee fees shown separately
- Adequate protection payments, if any, in the budget
- Minimum cash each week, and the financing need, if any
- Weekly variance reporting set up before the interim hearing
Questions owners ask
How fast must the budget be ready? For the first-day hearing, ideally before the petition is filed. That is why the cash work starts first.
Can the existing lender provide the DIP loan? Often it does, because it already holds liens on the assets. Terms still need court approval.
What if actual results miss the budget? The variance report explains why. Timing differences usually reverse; permanent shortfalls mean revising the budget with the lender.
Related: 13-week cash flow forecast · Chapter 11 reporting
General information, not legal advice.