Capitalizing interest

Description

Capitalizing interest involves adding accrued interest on a loan or investment to the principal balance, rather than paying it immediately. This strategy is used to manage cash flow, defer payments, or finance large projects when immediate funds are unavailable. By incorporating interest into the principal, it enables continued project progress or investment growth, but requires careful management to prevent excessive debt accumulation and ensure long-term financial sustainability.

Context

Partial or complete interest capitalization is a constructive alternative to accumulating new loans to finance interest due.

Counter-claim

Under USA banking regulations capitalization is currently tantamount to non-payment: the loans involved would be declared non-performing. A change in regulations will be needed to make this approach viable. Moreover automatic interest capitalization may prove unacceptable to commercial creditors, most of whom will prefer to keep the refinancing of interest a matter for negotiation.