When a business enters Chapter 11, one of the first practical questions is often simple and urgent: how does the company keep operating while the case is pending? Payroll, rent, vendor payments, insurance, utilities, and inventory do not pause just because a bankruptcy petition was filed.
That is where cash collateral and DIP financing come in. These are two of the main tools businesses use to fund operations during a reorganization. They can provide breathing room, but they also tend to come with court oversight, lender protections, and a great deal of negotiation.
In this post you’ll learn what cash collateral is, what DIP financing means, how each works in Chapter 11, why lenders often gain influence, what courts look for, and when a business may want to involve bankruptcy counsel early. If you’d like a broader overview of how these funding tools affect operations and lender leverage, this deeper discussion of keeping a business alive during Chapter 11 adds useful context.
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In general terms, cash collateral is cash or cash-like property in which both the bankruptcy estate and another party, usually a secured lender, have an interest. The Bankruptcy Code defines it broadly to include cash, deposit accounts, securities, and cash proceeds of collateral, including rents in some cases under 11 U.S.C. § 363(a). That definition matters because many businesses file Chapter 11 while their operating cash is already tied to a lender’s lien on receivables, inventory proceeds, or account balances.
A common example is an asset-based loan secured by accounts receivable and inventory. Once customers pay invoices, the money coming in may be part of the lender’s collateral package. After the bankruptcy filing, the debtor often cannot simply continue spending that money as though nothing changed.
Under 11 U.S.C. § 363(c)(2), a debtor in possession generally may use cash collateral only if the secured creditor consents or the court authorizes the use after notice and a hearing. That is why early Chapter 11 practice often includes an emergency motion seeking permission to use cash collateral for a short initial period.
DIP financing stands for debtor-in-possession financing. It is financing obtained after the bankruptcy case begins, typically by a company that remains in control of operations as a debtor in possession. The governing statute is 11 U.S.C. § 364, which allows a debtor to obtain unsecured or secured postpetition credit, sometimes with special protections for the lender.
In practical terms, DIP financing can look like:
The basic idea is straightforward: a business in Chapter 11 may still borrow money, but the borrowing often requires court approval and may involve priorities or liens that would not exist outside bankruptcy.
Chapter 11 is designed to give a business an opportunity to reorganize, sell assets in an orderly way, or otherwise maximize value. But none of that works if the company runs out of liquidity in the first days or weeks of the case.
That helps explain why funding motions are often among the first filings. Courts themselves describe Chapter 11 as a reorganization process, and the judiciary’s Bankruptcy Basics materials explain that a debtor usually continues operating its business as a debtor in possession while working through the case. Continuing operations, of course, generally requires cash.