What Does
Payment-in-Kind (PIK) Mean?
Payment-in-kind refers to the exchange of goods or services instead of cash in a corporate transaction. It closely resembles bartering in many respects. Payment-in-kind can be used when a company is short of cash but may be able to provide other goods or services that its creditor can use instead.
Payment-in-kind also refers to repaying a loan by providing the lender with an item in a similar class or category, such as cash. A borrower can therefore repay a loan made in cash with more cash, thus making the payment “in-kind”. A third definition of payment in kind refers to securities such as bonds or preferred stocks that pay investors with additional shares of the security instead of cash. As with the previous example, this tactic can be used when a company is short of cash but needs a legitimate way to pay off its debts.
Payment-in-kind is also used during estate settlement, when the deceased owns various types of assets such as securities, cash, real estate, cars, jewelry and furs, digital assets and equipment, RVs and other valuables such as stamp or coin collections. The executor can have all of these items appraised and then directly pass them on to the heirs in the most equitable manner without having to convert them all to cash. This can prevent having to sell these assets at depressed prices in order to liquidate the estate. This type of payment is then done “in-kind” instead of in cash. Of course, the executor will have to use their best judgement in distributing the various assets to the heirs if specific directions are not included in the will or trust. But the heirs will most likely end up with a higher dollar value in the end this way than they would if all of these assets had to be sold.
Divestopedia Explains Payment-in-Kind (PIK)
Payment-in-kind securities are considered a higher-risk form of investment, because they do not produce any form of cash. But they also pay higher rates of interest than other types of debt and are popular with aggressive fixed-income investors. PIK securities often pay rates of 10-15 percent, a substantial margin above other types of guaranteed instruments such as Treasury securities or CDs. In some cases, the investor has the right to decide whether to receive cash payments or payments-in-kind, but usually the issuer retains this privilege. This option can be tempting when a company is short of cash, but paying in kind ultimately only increases the company’s debts. Investors likewise will be required to pay taxes on the payments-in-kind when they may have little or no cash with which to do so.
Payment-in-kind transactions were common during the Great Depression, when unemployed people would offer themselves to homeowners to do all manner of work and chores in return for a meal. While the vast majority of these informal arrangements went unreported, businesses also did the same thing on occasion as a way to save money. Eventually this form of exchange came to the attention of the IRS, and it then dictated that companies that companies that received any type of payment-in-kind must report the fair market value of the goods or services received as taxable income. This type of bartering lost some of its appeal as a result.