Payment-in-Kind (PIK)
Candlefocus EditorPIK agreements are often seen favor of the borrower since they allow the borrower to save their existing cash and settle payments in the form of assets, products or services. For example, a borrower may be allowed to settle payments by providing their creditor with products or services that are valued at the corresponding payment amount instead of cash. This can help alleviate some of the pressure of scarce cash resources faced by the borrower.
However, PIK agreements may also be a risky venture because of their potential to become too diluted or burdensome to borrowers. Although PIK may help a business conserve its limited cash reserves, it may also increase interest charges, which may be added to the principal balance or cause dilution of shareholder equity. Additionally, the IRS treats bartering income, or Payment-in-Kind, as taxable income and requires businesses who receive income through bartering to report it on their income tax return.
Overall, Payment-in-Kind agreements may be an attractive option for businesses seeking alternative financing options, however, the potential risks are worth noting before entering into a PIK agreement. While PIK may help a business conserve cash and obtain financing, the loan may also lead to higher interest assessments and become a burden for the borrower. In addition, any income resulting from a PIK agreement is taxable and must be reported to the IRS. It is important for businesses to comprehensively consider the potential risks and benefits of entering into a PIK agreement before making the commitment.