Letter of credit

Definition

A bank's promise to pay a landlord or supplier if the business does not.

Why It Matters

It appears at this size in two places: a landlord who wants security deeper than a deposit, and a supplier extending terms to a company they do not know yet, which after a change of ownership can mean you. The bank charges an annual fee to stand behind it and treats it like lending, so it consumes borrowing capacity and usually wants collateral. If the seller's lease or supplier terms lean on one, plan for the bank conversation before closing, not after.

In numbers: A landlord asks for a $40,000 letter of credit instead of a cash deposit; the bank charges 1-2% a year to stand behind it and counts it against the company's borrowing capacity.