TL;DR: PIK (payment-in-kind) interest is interest that is added to a loan's outstanding principal instead of being paid in cash. It increases the balance owed over time but preserves the borrower's cash during the term, which can suit a company prioritising growth investment.
With payment-in-kind interest, the borrower does not pay some or any cash interest in each period. Instead, that interest is capitalised and added to the principal, so the outstanding balance grows. The borrower effectively defers the cash cost of that interest to later in the loan, typically to maturity, when the larger balance is repaid.
PIK trades near-term cash relief for a higher amount owed later, because the interest accrues on a growing balance. It is a tool for preserving cash when a company would rather deploy it into growth.
Venture debt facilities sometimes include a PIK component, where part of the interest is paid in cash and part is capitalised. This lowers the monthly cash cost of the facility during the term. Flow Capital's interest is paid monthly at a fixed or floating rate and may include a PIK component, depending on the deal.
Does PIK interest cost more overall? It can, because capitalised interest is added to the balance and then itself accrues interest. The benefit is lower cash outflow during the term.
Why would a company choose PIK? To keep more cash working in the business during the growth phase, accepting a larger repayment later.
Related terms: Interest-Only Period · Bullet Loan · Venture Debt
