PIK interest—payment-in-kind interest—is non-cash interest that increases the loan balance or is settled by issuing additional notes rather than wiring periodic payments.

How it works

Loan documents specify a cash-pay rate and sometimes a higher PIK rate if the borrower elects PIK during defined periods. Each accrual period adds interest to principal, and future interest compounds on the larger base. At maturity, refinancing, or acquisition, the company repays the inflated balance—or converts if the instrument is convertible.

Venture lenders may allow PIK during ramp phases; covenants often require reverting to cash pay when revenue thresholds are met. Credit investors in distressed situations may accept PIK when cash pay is impossible.

Document whether PIK interest compounds on itself or only on original principal—compounding terms change the balance at maturity materially over multi-year holds. Founders should align PIK end dates with expected equity or refinance events.

Accounting treatment accrues PIK as interest expense on the borrower P&L even without cash movement, which can affect covenant ratios tied to EBITDA or fixed charges.

Why it matters

• Founders: Trade short-term liquidity for higher eventual obligation—compare total cost to raising equity or cutting burn.
• Investors: PIK increases senior claims ahead of preferred and common in waterfalls; heavy PIK can wipe common in moderate exits.

Include PIK accrual in exit waterfall models any time venture debt sits ahead of common.

Common mistake

Ignoring PIK in exit models because no cash left the company monthly. The liability still reduces equity proceeds at close.

Related ideas

See payment-in-kind (PIK), venture debt, and interest accrual.