German YusufovSeptember 1, 2025

Cash keeps a stressed business alive, yet in bankruptcy, using it gets tricky fast. Many Arizona companies step into Chapter 11 with payroll due, vendors waiting, and customers to serve, all while current financing has dried up.

At Yusufov Law Firm, LLC, serving Mesa, Phoenix, and Tucson, we help businesses and individuals sort out funding choices that keep operations running. This article explains the difference between debtor-in-possession (DIP) financing and cash collateral, so you can see which tool fits your situation.

Cash Collateral: An Overview

Cash collateral is cash, deposit accounts, receivables, or other liquid assets where both the bankruptcy estate and another party, usually a secured lender, have an interest under 11 U.S.C. § 363(a). It often includes proceeds from your inventory and accounts. In short, it is money that is already spoken for by a lien.

Secured creditors typically hold a security interest in inventory, accounts receivable, and the proceeds of those assets. That lien follows the proceeds, which is why the lender’s consent or a court order is needed before the debtor uses the cash.

Under 11 U.S.C. § 363(c), a debtor can use cash collateral only with the secured creditor’s consent or court authorization. Arizona bankruptcy courts regularly require a motion and a proposed budget, and judges expect quick, clear information early in the case.

When asking to use cash collateral, the motion should describe the deal clearly. Most courts want to see these items on day one:

  • The name of each secured lender with an interest in the cash.
  • The purpose of the proposed use and how long it will last.
  • Material terms, including any reporting and budget covenants.
  • Adequate protection offered to the secured creditor, such as replacement liens or payments.

The court can allow preliminary use to prevent immediate and irreparable harm to the estate, then hold a final hearing a short period of time later. Debtors are also expected to segregate and account for cash collateral during the case.

DIP Financing: An Overview

DIP financing, or debtor-in-possession financing, is new credit obtained after the bankruptcy filing that lets a debtor in Chapter 11 fund operations and restructuring. It is grounded in 11 U.S.C. § 364 and is often the lifeline when cash collateral alone cannot cover expenses.

DIP credit can be unsecured or secured, with protections that increase step by step for the lender. Courts review the terms and priority of the loan, which can include super-priority claims or liens on unencumbered assets, depending on what the record supports.

A core piece of any DIP agreement is the budget. Lenders and courts often rely on a multi-week cash flow forecast, coupled with reporting and variance limits.

With both tools in view, it helps to see how they differ in source, approval, and protections.

Key Differences Between Cash Collateral and DIP Financing

Cash collateral draws on assets you already have, subject to a lender’s lien. DIP financing brings in new money after the case starts. The table and points below highlight the biggest differences.

Quick Comparison Table

Topic Cash Collateral DIP Financing
Source Existing cash and receivables subject to a lien New funds advanced post-petition
Approval Consent of secured creditor or court order under § 363(c) Court approval under § 364 after showing need and terms
Protections Adequate protection to secured creditor under § 361 Super-priority claims, liens, or priming liens under § 364
Budget Budget governs use and reporting multi-week cash flow plan central to approval
Impact on Existing Liens Replacement liens common Possible priming over existing liens if adequately protected
Typical Use Keep operations running using current resources Provide extra capital to stabilize and restructure

 

Now, let’s walk through each difference with a bit more detail.

Source of Funds

Cash collateral uses your own cash, receivables, or proceeds that are already encumbered. Lenders care about how those funds are spent since it affects their collateral position.

DIP financing brings in new money from a post-petition lender. That lender often demands strong protections in return for lending to a debtor in Chapter 11 bankruptcy.

Purpose

Cash collateral keeps the lights on using resources already in the business. The focus is paying payroll, buying inventory, and covering rent and insurance.

DIP financing gives extra capital to fund operations, a sale process, or plan-related work. It can be used as bridge funding to get to confirmation of a reorganization plan, or to allow a well-run asset sale.

Requirements for Use

Using cash collateral requires consent or a court order after showing the creditor is protected. The debtor must propose adequate protection that fits the situation.

Getting DIP financing always needs court approval. The higher the priority or lien requested, the closer the court looks at the terms and the record under 11 U.S.C. § 364.

Lender Protections

Cash collateral orders focus on adequate protection, often in the form of periodic payments, reporting, and replacement liens under 11 U.S.C. § 361. The goal is to prevent a decline in the lender’s position.

DIP financing terms can include a super-priority claim, liens on unencumbered assets, junior liens, or even priming liens under 11 U.S.C. § 364. Priming requires a strong record that other credit is unavailable on less aggressive terms, plus adequate protection for primed lenders.

Those protections tie directly into the next topic, adequate protection, which is the backbone of both tools.

Adequate Protection: Safeguarding Lender Interests

Adequate protection protects a secured creditor’s interest in property used during the case. It aims to prevent a measurable decline in the creditor’s position while the debtor operates.

Under 11 U.S.C. § 361, adequate protection can include several forms:

  • Periodic cash payments.
  • Replacement liens.
  • Other relief that provides the “indubitable equivalent” of the creditor’s interest, but not an administrative expense claim.

Valuation matters a lot. Courts often look at whether there is an equity cushion and how reliable that cushion is given market conditions and the debtor’s burn rate.

That same record often appears again in the DIP hierarchy, which sets how far protections for new lenders can go.

Types and Priorities of DIP Financing

Section 364 creates a ladder of options. The debtor climbs only as high as needed to secure credit.

  • Unsecured debt in the ordinary course of business with administrative expense status.
  • Unsecured debt outside the ordinary course, with court approval.
  • Secured debt on unencumbered property or junior liens, plus super-priority claims.
  • Priming liens that outrank existing liens if credit is unavailable on less aggressive terms and existing lenders are adequately protected.

Courts in Arizona and elsewhere look for a solid showing that lesser relief will not work before approving priming liens or similar heavy protections.

Even with court approval, proposed orders can contain terms that draw objections from other creditors. The next section flags the big ones.

Potential Risks and Lender Terms in DIP Financing and Cash Collateral Agreements

Some terms, while common in drafts, often raise concerns for other creditors and the U.S. Trustee. They can shift too much control or value to one lender.

  • Cross-collateralization, where prepetition debt becomes secured by post-petition assets. Courts treat this with care, and some districts disfavor it.
  • Roll-ups, which refinance prepetition debt into the DIP loan. This can improve the lender’s position and is often negotiated with strict milestones and a real new-money component.
  • Liens or claims on avoidance actions or their proceeds. These actions often remain unencumbered to preserve value for unsecured creditors.
  • Waivers of rights, including short deadlines to challenge liens, or waivers of 11 U.S.C. § 506(c) surcharges. Courts often limit these, especially in interim orders.

Arizona bankruptcy courts commonly require clear disclosure of these provisions and a fair budget.

How Yusufov Law Firm Can Assist You

You do not have to guess your next step. A short call can bring real clarity on budgets, timing, and lender terms that make sense for your business. Reach us at 520-745-4429 (Tucson) or 480-788-0098 (Phoenix), or connect through our Contact Us page to set up a consultation. We welcome your questions and will walk you through options that protect your cash and give your reorganization a fair shot.