Priming Loan

What is a Priming Loan?

A priming loan is a form of debtor-in-possession (DIP) financing that permits a company that is in Chapter 11 bankruptcy proceedings to obtain credit to aid specific areas of its business operations and reorganization. Funds from a priming loan can typically be utilized exclusively to maintain the core business, for example, repairs, supply chain management, and payroll. A priming loan may likewise be called a DIP loan.

How a Priming Loan Works

Priming loans are normally negotiated in the weeks leading up to the beginning of Chapter 11 proceedings.

Companies that go into a Chapter 11 reorganization are quite often run by a similar management as before their bankruptcy filing. The company that has sought financial protection is known as a debtor in possession or DIP. The bankruptcy filing gives the DIP protection from the claims of creditors, yet in addition makes it likely that the company will require immediate financing to cover payroll and other pressing costs. The company's vendors might give a financing to inventory, however they are bound to require cash on delivery or cash before delivery.

Since it is, in effect, a loan to a bankrupt company, lenders willing to make a priming loan face some additional risk. A priming loan must likewise fulfill requirements for the borrower's existing creditors, and language in the loan contract might call for money to be automatically set to the side by the debtor company to pay interest and outstanding debt to those existing creditors.

Incumbent creditors — those secured lenders who loaned money to the company before it petitioned for financial protection — will have something to do with whether the company can get a priming loan. This is on the grounds that repayment of a priming loan will take priority over any pre-existing debts the company has. A priming loan is legitimate just until a company rises up out of bankruptcy.

Upsides and downsides of a Priming Loan

According to the borrower's point of view, a priming loan (or DIP loan) can give the cash that a company needs to traverse a Chapter 11 reorganization sufficiently sound to make a new beginning. It might likewise be the main reasonable option the company has.

In any case, suppliers of debtor-in-possession financing, like priming loans, are taking a huge risk in lending to companies that are wending their direction through the bankruptcy and reorganization process. Thusly, the courts stretch out to DIP lenders a number of critical protections.

In the event that a debtor company can demonstrate that it couldn't obtain financing by some other means, the bankruptcy court might approve the company to grant the DIP lender a lien that has priority over pre-bankruptcy secured lenders as well as over administrative expenses, including vendor and employee claims. With such a lien, known as a priming lien, the DIP lender can typically insist on main goal to the debtor's inventory, receivables and any cash. The loan agreement may likewise give the DIP lender a subsequent lien on encumbered property and primary goal on the debtor's unencumbered property.

A priming loan can assist a company with emerging from bankruptcy and make a new beginning.