A letter of credit is issued by the bank to a vendor that your business is working with in some capacity. Typically, you apply for a letter of credit using cash, real estate, or some other business asset as collateral. Once approved, your lender will create a letter of credit guaranteeing funds to a specific vendor. If you are unable to pay the vendor, the bank is obligated to do so and will use the collateral to cover the amount paid.
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