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Fair Game

What to know about your loans before buying another business

Q: We recently acquired another company, using seller financing and existing cash to complete the purchase. When we approached our banker about a working capital line of credit to combine the firms, he demanded repayment of our loans, citing violations of our loan covenants. Can he do this? What are our options?

A: Rule No. 1: Bankers don't like surprises. When you closed your loans, the banker imposed some restrictive covenants that prevent you from taking on additional debt or further leveraging your company without his prior approval. If he refuses to reconsider, focus on finding another lender. Your new lender may impose some of the same restrictions, but my guess is you won't make this mistake again. Make sure you can live with any and all covenants before you sign on the dotted line, and keep your lender informed of your decisions about growing your company. It could save you a lot of time, money and entrepreneurial agony in the future.


Doug Hood is founder and president of Rainmaker Capital Corp. Send your questions and comments to doughood@rainmakercapital.com.

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This article was originally published in the July 2001 print edition of Entrepreneur with the headline: Fair Game.

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