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Fair Game

What to know about your loans before buying another business

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This story appears in the July 2001 issue of Entrepreneur. Subscribe »

Q: Werecently acquired another company, using seller financing andexisting cash to complete the purchase. When we approached ourbanker about a working capital line of credit to combine the firms,he demanded repayment of our loans, citing violations of our loancovenants. Can he do this? What are our options?

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

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