Legal Definitions - letter of license

A letter of license is a formal, voluntary agreement entered into by a business facing financial difficulties and all of its creditors. Under this arrangement, the creditors collectively agree to grant the struggling business a temporary reprieve. This typically involves allowing the business more time to repay its outstanding debts, permitting it to continue its operations, and providing protection from immediate legal actions, such as lawsuits or demands for payment, during the agreed-upon period. The primary purpose is to give the business a chance to stabilize its finances, implement a recovery plan, and ultimately fulfill its obligations to its creditors.

Here are some examples to illustrate how a letter of license might work:

• Example 1: Small Manufacturing Company

  Scenario: "Precision Parts Inc.," a small manufacturer, faces a temporary cash crunch because a major client's payment for a large order is unexpectedly delayed by three months. They have several suppliers (creditors) who are due payment soon, and without relief, Precision Parts Inc. might have to halt production or declare bankruptcy.

  Application: Precision Parts Inc. approaches its suppliers and explains the situation, presenting a clear plan for how they will recover once the client payment arrives. All suppliers agree to a letter of license, granting Precision Parts Inc. an extra four months to pay their invoices. During this time, the suppliers agree not to sue the company or demand immediate payment, allowing Precision Parts Inc. to continue production and fulfill other orders, confident that they will be paid once the delayed client payment comes through. This agreement prevents immediate collapse and gives the business a chance to recover.

• Example 2: Regional Retail Chain

  Scenario: "Fashion Forward," a regional clothing retail chain, has been struggling with declining sales due to increased online competition. They have significant inventory and store lease obligations, and their bank loans are becoming difficult to service. They've developed a new business strategy focusing on e-commerce and unique product lines, but need time to implement it.

  Application: Fashion Forward presents its recovery plan to its bank, landlords, and key merchandise suppliers (its creditors). Recognizing the potential for the business to turn around with this new strategy, all creditors agree to a letter of license. This agreement extends the repayment terms for existing loans, temporarily reduces lease payments, and allows the chain to continue operating its stores and implementing its new strategy without the immediate threat of foreclosure or bankruptcy proceedings. The creditors hope that by giving Fashion Forward this breathing room, the business will recover and eventually pay back its full debts.

• Example 3: Construction Firm

  Scenario: "BuildRight Construction" recently completed several large projects but experienced unexpected cost overruns and delays, leaving them with insufficient cash flow to pay their subcontractors and material suppliers on time. They have new, profitable contracts lined up for the next year, but need to survive the current financial squeeze.

  Application: BuildRight Construction holds meetings with all its subcontractors and material suppliers. They demonstrate their financial projections for the upcoming profitable contracts and propose a phased repayment plan. All creditors agree to a letter of license, giving BuildRight Construction six months to consolidate its finances from the new projects before resuming full debt payments. This agreement prevents the subcontractors from filing liens or lawsuits, allowing BuildRight to maintain its workforce and complete the new contracts, which will ultimately generate the revenue needed to pay off all outstanding debts.