In 2022, there were 13,125 cases of business bankruptcy filed nationwide in the United States. According to Statista, the number of business bankruptcies in the United Stats has been in decline, reaching a peak in 2009.
Factoring is one of the few methods of financing readily available to small business owners struggling to re-establish their business through a Chapter 11 bankruptcy or reorganization. While such “restructuring” of debt is commonly provided through the asset-based lending community for larger business entities, small business operators are only served by the factoring community.
Bankruptcy factoring or “DIP” financing (Debtor-In-Possession), is a unique niche area of factoring which requires a high degree of due diligence and additional legal processes not found in everyday factoring transactions. Because of these additional requirements, all factors do not provide service in this particular niche area. Though DIP deals are an area most brokers tend to ignore, it is one that can generate significant annual revenue for those that become familiar with its inner workings.
When underwriting a prospective client for DIP factoring, the factor will look closely at the cause of the insolvency to determine if a factoring arrangement can solve the problem. If factoring can address the cause of the business’s problems and, under normal circumstances, help return the business to profitability, a factoring arrangement may be established.
To establish a DIP financing arrangement, the factoring agreement must be approved by the federal bankruptcy court. If approved, the factor will be granted relief from something called the automatic stay, which is part of federal bankruptcy law and provides protection for debtors (and customers) from collections during the period of the bankruptcy. Since factors will be purchasing invoices and collecting upon them, they must be granted relief from the legal limitations placed upon them by the automatic stay. Additionally, factors will be purchasing assets (invoices) of the insolvent business and all such asset sales must be approved by the bankruptcy court.
For small business owners, access to DIP financing through factoring during troubled times can literally make the difference between survival and a complete business liquidation. Very few business owners, however, are aware of this critical financing option available through factoring. In many instances, factoring can help to return the business to profitability and provide the means for the business to meet its obligations owed to previous lenders and creditors.
As said, DIP deals can be a good source of revenue for brokers that build relationships with attorneys that specialize in corporate and bankruptcy law. Successful marketing into this unique but “rich” niche factoring area can provide clients that will often utilize factoring services for years and years, providing a long term source of commission revenue for the sourcing broker. When building your personal database of lenders in Pipedrive or your CRM of choice, make sure you make notes of factors that feature DIP financing on their websites.
Find Out More
As a broker, this is an area that is commonly ignored yet it one of the lucrative opportunities available in “tough times”. It’s important your long standing prospects are aware of this powerful tool called factoring. Find out more about DIP financing in the Campus Academy at www.iacfb.academy.