If you have already filed for protection from your creditors in order to reorganize under Chapter 11, then you know that you have little chance to take on new debt to fund your operations.
But there is still a way to raise cash and that is through a process called factoring.
A factor is a company that will pay you an advance in exchange for collecting on your invoices.
The reason you can use this in bankruptcy is because factors are not lenders; they are buyers of your assets that help you enhance your cash flow.
Before such an arrangement can be made, there are several steps that are gone through first.
To start with, the factor will analyze the reasons for the bankruptcy to determine whether there were mitigating circumstances and whether the company could be profitable under normal operations.
Then, in order to enter into a factoring arrangement, the bankruptcy court must approve and appoint the factor.
Then the factor must be freed from the conditions imposed by the court where the debtor (your company) is protected from most collection activities.
Since the factor is going to be collecting the amounts due on your invoices, this, too, has to be approved by the bankruptcy court.
In addition, since asset sales are usually prohibited under the terms of the bankruptcy, and the factor will be in effect buying the accounts receivable asset, the court will have to approve this aspect as well.
Very often, this just requires the factor to appear before the court and petition for this arrangement.
Unless there are special circumstance that might prevent this, the courts will tend to approve this as it is a way to help the company in question recover from their bankruptcy.
Although there is much more due diligence required and many more legal steps that have to be followed by the factor than in a normal factoring arrangement, this is still one of the only ways that a company operating under Chapter 11 can raise cash.
It is certainly not a slam dunk deal, but it could be well worth looking into.