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Using CARES Act Funds As Financing For a Small Business Chapter 11 Bankruptcy

One of the problems that prevents small businesses from using Chapter 11 bankruptcy more widely is the lack of affordable financing to fund operations while a Chapter 11 case is pending. Called Debtor in Possession (“DIP”) financing, financing for deeply distressed small companies that are experiencing an interruption in cash flow can be prohibitively expensive and difficult to obtain.

The recently passed CARES Act, however, does not appear to have any express limitation on the extension of loans to small businesses operating under Chapter 11. While implementing regulations and underwriting standards are still being developed, it is hoped that regulators will take into account the remedial nature of the loans available under the new statute and not create new barriers to lending to Chapter 11 debtors that are not in the statute itself.

When used in combination, the newly expanded Small Business friendly Chapter 11 provisions and the new sources of financing provided by the CARES Act may allow many small companies to survive this ongoing crisis.

By: Neil J. Smith

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