Cash Interest vs. PIK Interest
When you take out a loan, you either pay the Interest in either Cash or PIK (Paid in Kind).
Cash Interest is what you’re likely familiar with, you pay it at the end of a predetermined time, usually each year.
PIK Interest is different as it gets added to the debt balance it’s attached to.
Both are treated as an expense in the year in which the interest was incurred. So you can’t look at an Income Statement and discern if it’s PIK or Cash.
In the room
PIK is a favorite for testing whether you understand cash versus accrual. It's expensed on the income statement like cash interest, but no cash leaves. It compounds onto the debt balance instead, which is why it's expensive and used by stretched borrowers.