DIP ABL Financing: How Asset-Based Debtor-in-Possession Loans Work

Why DIP ABL Financing Is the Difference Between Reorganization and Liquidation

A company that files Chapter 11 without secured post-petition financing is usually not reorganizing. It is winding down under court supervision. The difference between those two outcomes is DIP financing -- specifically, the liquidity that keeps payroll running, suppliers shipping, and the business operating through the restructuring process.

For asset-heavy middle-market companies -- distributors, manufacturers, staffing companies, retailers, and industrial services businesses -- that DIP financing usually takes the form of an asset-based DIP facility. DIP ABL combines the collateral structure of a conventional asset-based loan with the super-priority protections the Bankruptcy Code provides to post-petition lenders. Used properly, it is the most cost-effective and operationally realistic way to bridge a business through Chapter 11 to a sale, confirmation, or emergence.

At Don Clarke Enterprises, we structure and place DIP ABL facilities for distressed middle-market borrowers and their counsel. Donald Clarke has been advising on asset-based lending since 1986 -- SFNet Hall of Fame inductee, author of Asset Based Lending Disciplines, the industry's first textbook, and advisor who has trained more than 5,000 lending professionals at institutions including GE Capital, JP Morgan Chase, Lloyds, and Barclays on exactly this kind of structure. Here is how DIP ABL financing actually works, what the court-approval process looks like, and where the leverage sits for a debtor running toward a first-day hearing.

The Two Paths to Post-Petition Liquidity

Under the Bankruptcy Code, a debtor has two basic ways to access operating liquidity after filing: use of cash collateral under Section 363 (with consent of the secured lender or over its objection with adequate protection) or new secured borrowing under Section 364. Most middle-market Chapter 11 cases require both -- cash collateral to draw against the existing borrowing base while a new DIP facility is being documented, followed by a new-money DIP that expands availability, refinances the prepetition lender, or both.

DIP ABL is a Section 364 financing secured by the debtor's accounts receivable, inventory, and sometimes M&E. What separates it from a conventional ABL facility is the layer of bankruptcy protections the court grants the DIP lender in exchange for providing post-petition capital to a distressed borrower.

The Four Protections That Make DIP Lending Work

1. Super-Priority Administrative Expense Status

DIP loans are elevated to super-priority administrative expenses under Section 364(c)(1), meaning they get paid ahead of most other unsecured post-petition obligations, including ordinary administrative expenses. If the case converts to Chapter 7 or the plan fails, the DIP lender stands first in line for recovery out of whatever is left.

2. Priming Liens or Senior Liens on Unencumbered Assets

The court can authorize the DIP lender to take a lien senior to existing secured creditors -- a priming lien under Section 364(d) -- when the debtor cannot obtain financing on any other reasonable terms and the existing secured creditor is adequately protected. More commonly, the DIP lender takes a senior lien on unencumbered assets under Section 364(c)(2) or a junior lien on encumbered assets under Section 364(c)(3). For ABL, the typical structure is a consensual arrangement with the prepetition ABL lender, often involving a roll-up of the prepetition debt into the DIP facility.

3. Court-Approved Budget and Reporting Discipline

Every DIP facility runs against a court-approved 13-week cash flow budget. The debtor's actual performance is compared to budget weekly or bi-weekly, with variance covenants that trip events of default if the business misses. The budget is the operating discipline of the case. Weak budgets approved at the first-day hearing become problems within four to six weeks. Well-built budgets -- stress tested, realistic, and aligned with the restructuring strategy -- anchor a case.

4. Milestone and Restructuring Covenants

DIP facilities typically include case milestones: a deadline to file a disclosure statement, to run a Section 363 sale process, to confirm a plan, or to exit bankruptcy. Missing a milestone is an event of default. These milestones are heavily negotiated because they effectively dictate the pace of the case. An advisor who has done this before fights for workable milestones rather than accepting lender-friendly defaults that put the debtor on a forced-sale track.

How DIP ABL Facilities Are Sized and Priced

A DIP ABL facility is sized against the prepetition borrowing base adjusted for distressed conditions. Advance rates on receivables are typically held at the prepetition levels -- 80 to 85 percent on eligible AR -- but the definition of eligibility often tightens. Past-due thresholds shrink. Dilution reserves widen. Customer concentration caps drop. Our recent post on eligible vs. ineligible receivables walks through the standard exclusions; in a DIP context, most of those categories get more restrictive.

Inventory advance rates drop more sharply. Prepetition NOLV advance rates of 70 to 80 percent of net orderly liquidation value commonly compress to 50 to 65 percent in a DIP facility, reflecting the possibility of a forced-liquidation outcome.

Pricing on DIP ABL facilities in today's market is materially above conventional ABL. Spreads over SOFR have run 600 to 1,000 basis points on middle-market deals, with commitment fees, undrawn line fees, exit fees, and professional fee reimbursements stacked on top. Market reporting shows all-in DIP financing rates in the 12 to 18 percent range as of early 2026. The pricing reflects the risk -- and the fact that the lender is funding a business with negative cash flow into an uncertain restructuring outcome.

The Interim Order / Final Order Structure

DIP financing is approved in two stages. Within 24 to 48 hours of filing, the debtor brings an emergency motion before the court at the first-day hearing seeking an interim order approving limited access to the DIP facility -- typically enough to fund the next two to four weeks of operations and avoid immediate disruption. Interim access is usually 25 to 50 percent of the full commitment, calibrated to the minimum cash needed to bridge to the final hearing.

The final hearing occurs 25 to 40 days after filing, giving the unsecured creditors' committee, the U.S. Trustee, and other parties-in-interest time to review the terms, raise objections, and negotiate modifications. At the final hearing, the court enters the final DIP order authorizing access to the full commitment on the fully negotiated terms.

This two-step process is where most of the real negotiation happens. The interim order is often accepted largely as proposed because the debtor needs the money now. The final order is where the committee, the U.S. Trustee, and second-lien lenders get to push back on aggressive roll-ups, liens on avoidance action proceeds, challenge period limitations, stipulations, and milestones. Experienced debtor's counsel builds the interim order knowing it will get sharpened for the final.

Roll-Ups: The Most Contested Feature of DIP ABL

When the prepetition ABL lender provides the DIP facility, it will almost always seek a roll-up of the prepetition debt into the DIP. A roll-up converts pre-petition secured debt -- which would otherwise wait in line behind administrative expenses for recovery -- into super-priority DIP debt that gets paid ahead of almost everything else.

Roll-ups are controversial because they improve the recovery position of an existing creditor using new-money financing that benefits the estate. Unsecured creditors' committees routinely object. Courts evaluate roll-ups case-by-case, weighing the benefit of the DIP facility against the priority shift.

The industry has evolved several variants. A cashless roll-up refinances the prepetition debt without any actual cash movement. A creeping roll-up converts prepetition balances into DIP obligations as new DIP advances are made, rather than all at once upon entry of the interim order. Recent deals have used creeping roll-ups at the interim stage followed by full refinancing on entry of the final order -- a structure that has shown up in large ABL-dominated cases. The debtor's advisor has to understand the structure well enough to negotiate it; the lender certainly does.

Sources of DIP ABL Capital

Three categories of capital providers regularly participate in middle-market DIP ABL:

The Prepetition ABL Lender

Most common path. The incumbent already has the collateral file, the borrowing base detail, and the legal agreements in place. A priming fight is avoided. Deal moves fast. The trade-off is the roll-up dynamic and the fact that the prepetition lender's priorities -- often tilted toward a quick 363 sale rather than a full reorganization -- become the case's priorities.

Third-Party DIP Lenders (Non-Bank ABL and Private Credit)

Specialty non-bank ABL lenders, turnaround-focused finance companies, and private credit funds regularly provide DIP facilities, particularly when the debtor wants to refinance the incumbent or when the incumbent is unwilling to fund through the case. These lenders can price aggressively but often come with stricter milestones and tighter operational covenants. Our post on how private credit is reshaping ABL covers how the non-bank side of the market works.

Stalking Horse or Sponsor DIP

In 363 sale cases, the stalking horse bidder may provide the DIP facility, using it to bridge the debtor to the sale and then credit bid the DIP at closing. Sponsor DIPs from existing equity holders also occur, particularly in smaller cases where no third party will step in. Each has specific governance issues that need to be navigated carefully.

What Good DIP Placement Actually Requires

Running a DIP process is different from placing a conventional ABL facility. Three things matter most:

Speed and Parallel Process

The filing calendar often runs from first client call to bankruptcy filing in two to six weeks. DIP placement has to run in parallel with the petition preparation. That means building the credit package, targeting the right lenders, negotiating term sheets, and drafting the DIP order all at once -- not sequentially. Borrowers who wait until filing to start the DIP conversation usually end up taking what the prepetition lender offers.

Credibility With the Lender Community

DIP lenders do not fund companies whose advisors they do not know. A cold call from a broker with no distressed track record gets nowhere in the timeframes DIP deals require. Relationships at the senior level of the specialty lender community -- the same lenders that participate in ABL for turnaround and distressed situations -- determine whether a DIP deal gets done at all.

Technical Discipline on the Order

The DIP order is a 60-to-120-page legal document that dictates how the case runs. Every provision matters: milestone dates, carve-outs for professional fees, challenge periods for committee investigation of prepetition liens, scope of the super-priority lien, treatment of avoidance actions, waterfall provisions on sale proceeds. Weak debtor-side representation on the order produces a DIP facility that controls the case. Strong debtor-side representation produces a DIP facility that supports the case.

Why DCE

We place DIP ABL facilities for middle-market debtors and their counsel. We work with bankruptcy counsel from the pre-filing stage through the final order, building the credit package, targeting the right lenders, negotiating term sheets, and managing the technical dialogue with the lender's counsel on the DIP order. We do not consult. We execute.

Don Clarke has been inside ABL deal mechanics for four decades. He founded Asset Based Lending Consultants in 1986 and has trained most of the professionals who now run the turnaround and DIP desks at the specialty lenders active in this market. That depth of relationship is what gets a DIP financing placed in the compressed timeframes a Chapter 11 demands.