Many lenders see debtor financing as a mandatory credit option, as insolvency loans are particularly taken into account by U.S. bankruptcy legislation. By law, DIP creditors must receive payment before other creditors. Many lenders will commit to a Chapter 11 DIP loan, whereas in the absence of an insolvency application, they would not make a credit commitment for the same company. On March 27, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) came into effect to provide $2.2 trillion in de-icing to U.S. businesses and citizens. The CARES Act provided approximately $376.5 billion for the financing of “small businesses” (less than 500 employees or the standard size of the business established by the U.S. Small Business Administration (SBA) and represents $349 billion under the new Paid Cheque Protection (PPP) program created under SBA`s Credit 7 (a) program. Although the first ppp has already been fully used, it has been reported that approximately $310 billion in additional P3 credits are being made available. The P3 provisions of the CARES Act do not explicitly prohibit the use of the DIP financing program in the event of bankruptcy, but the SB credit criteria require that a borrower be “solvent” and that the credits be “strong enough to reasonably guarantee repayment.” [4] While the availability of IDPs should be reviewed under the CARES Act, the insurance guidelines will largely determine whether a lender may prefer such a loan.

Unlike PPPs and other small business provisions, the SME Assistance section of the CARES Act expressly provides that an SME (an “eligible company” employing “between 500 and 10,000 employees”) who receives a support loan cannot be a debtor in bankruptcy proceedings. [5] The approved budget is an important aspect of IDLP funding. The “DIP budget” may contain a forecast of revenues, expenditures, net flows and outflows for working periods. It must also take into account the date of payments to borrowers, fees, seasonal variations in revenues and possible capital expenditures. Once the DIP budget is approved, both parties will agree on the amount and structure of the credit facility or loan. This is only part of the negotiations and leg work needed to ensure the funding of the DIP. Where a debtor can prove that financing cannot be obtained on any other basis, a bankruptcy court may authorize the debtor to borrow money on a secure basis and grant the lender a “Priming Pfandrecht” predominant on the prior petition of secured creditors, as well as a high priority claim on all other claims.