Payment-in-kind (PIK) interest is interest that is not paid in cash as it falls due but instead accrues and is added to the loan principal, compounding until maturity or refinancing. It allows a borrower to preserve cash during a build, turnaround or growth phase, in exchange for a higher overall cost and a larger repayment at exit.
PIK shifts debt service into the future, easing near-term cash flow but increasing leverage over the life of the loan.
Common in mezzanine, unitranche and development financings.
Payment-in-kind (PIK) interest is interest that is not paid in cash as it falls due but instead accrues and is added to the loan principal, compounding until maturity or refinancing. It allows a borrower to preserve cash during a build, turnaround or growth phase, in exchange for a higher overall cost and a larger repayment at exit.
Common in mezzanine, unitranche and development financings.
Cash-pay interest is paid in cash as it falls due. PIK interest is not paid currently: it accrues and is added to the loan principal, compounding until maturity or refinancing. PIK preserves near-term cash but increases the overall cost and the final repayment, since interest accrues on the accrued interest.
During a build, turnaround or growth phase, when cash is better kept in the business than paid out as debt service. It is common in mezzanine, unitranche and development financings. The trade-off is higher overall cost and a larger repayment at exit, so a credible refinancing or sale matters.
Speak to a partner about how this applies to your transaction.
