A layer 3 switch is basically a switch with routing capabilities. It is able to route packets to another network which is very crucial amongst Virtual LANs (VLANs). Some layer 3 switch also have some firewall functionailities which can help improve security. With the use of a layer 3 switch, VLANs are able to communicate with each other without the use of an additional router.
To understand the difference between a normal switch and a layer 3 switch, check out video [youtube]