Direct lending, a form of private debt financing, has emerged as an increasingly popular alternative investment strategy, offering investors the potential for attractive yields in any interest rate environment. However, the yields on direct lending are subject to a myriad of factors that can significantly impact returns. In this blog, we’ll delve into the key factors that influence yields on direct lending, shedding light on the complexities and considerations involved in this investment approach. Plus, we’ll examine some features within AXIS by AIO Logic that allow direct lenders to automate and optimize their processes.

Credit Risk and Borrower Profile

One of the primary determinants of yields on direct lending is the credit risk associated with borrowers. Direct lenders extend loans directly to businesses or individuals, bypassing traditional financial intermediaries such as banks. As a result, assessing the creditworthiness of borrowers becomes crucial. Higher-risk borrowers are typically charged higher interest rates to compensate for the increased likelihood of default, potentially leading to higher yields for direct lenders. Conversely, lower-risk borrowers may command lower interest rates, resulting in relatively lower yields.

As such an important factor of direct lending yields, credit assessment was a vital focus of ours when building AXIS by AIO Logic. That’s why we included powerful financial analysis tools that allow lenders to have a clear picture of a borrower’s financial health prior to (and during) a loan. Once financials are spread into AXIS, the platform automatically performs vertical, horizontal, and trend analysis in order to calculate 42 financial ratios and score borrower financial health. If AXIS detects deteriorating financial trends, an alert is triggered on the Portfolio Manager dashboard.

Loan Structure and Terms

The structure and terms of the loans offered by direct lenders play a significant role in determining yields. Factors such as loan duration, repayment schedule, and collateral requirements can impact the risk-return profile of direct lending investments. Longer-term loans, or those with more flexible repayment terms, may offer higher yields to compensate for the additional risk and liquidity considerations. Additionally, loans secured by tangible assets or backed by strong collateral may provide greater downside protection, influencing the yields for direct lenders.

The flexibility of loan structures and terms is one of the great advantages for direct lenders, and therefore, is a key focus of AXIS by AIO Logic. In fact, AXIS has native handling for every commercial loan structure including amortizing, revolving, ABL, delayed draw, interest only, factoring, and more. Additionally, AXIS provides independent functionality for Current and PIK interest, as well as simple and compounding interest. For lenders who want to use variable rate structures, they can choose the desire index, index calculation logic, and set the margin to be added to the index rate. In short, AXIS allows lenders to structure loans however suits them best!

Economic Outlook and Business Environment

The broader economic outlook and business environment can impact the yields on direct lending investments. Economic growth prospects, industry trends, and macroeconomic indicators can influence the creditworthiness of borrowers and the overall performance of loan portfolios. In periods of economic expansion, businesses may have greater access to capital and experience lower default rates, potentially resulting in lower yields for direct lenders. Conversely, economic downturns or industry-specific challenges may lead to higher default rates and higher yields to compensate for increased risk.

In addition to the borrower-specific financial analysis mentioned earlier in this blog, AXIS by AIO Logic also performs analysis of the industry to which the borrower belongs. After being set during the loan setup, the borrower’s industry is monitored to track any concerning trends in that industry. When taken together with the tracking of borrower financial health, these analysis tools provide lenders with a clear understanding of potential risks associated with a loan.

Regulatory Environment and Legal Framework

The regulatory environment and legal framework governing direct lending activities can affect yields and investment returns. Compliance requirements, licensing regulations, and legal protections for lenders can impact the operational costs and risk management practices of direct lending platforms. Changes in regulations or legal interpretations may require lenders to adapt their strategies or adjust pricing to comply with evolving requirements, potentially affecting yields on direct lending investments.

As a truly end-to-end loan management platform, AXIS by AIO Logic has powerful functionality at every stage of the loan lifecycle, and compliance is no different. In AXIS, all loan covenants are parametric and centrally tracked in the Loan record. Once the parameters are set, AXIS automatically creates a compliance calendar that notifies both parties of upcoming requirements, so everyone is on the same page. Additionally, AXIS enables compliance certificate submission and automated covenants tracking through the customer portal, along with automatic testing and alerts relating to covenant thresholds.

Portfolio Diversification and Risk Management

In order to achieve portfolio diversification that generates desired high yields, lenders need to be able to effectively analyze their portfolio to see what is providing the best returns, so they can try to source more deals like those top performers. In AXIS by AIO Logic, we offer a robust suite of automated portfolio reporting and analytics out of the box, while also allowing customized reporting and analytics to be created. Included in our suite of portfolio analytics are static pool and collection analysis, portfolio stratification, automated testing, and portfolio performance KPIs. To learn more about these features, please visit the Features page of our website.


Direct lending offers investors the opportunity to earn attractive yields by providing financing directly to businesses and individuals. However, yields on direct lending are subject to various factors, including credit risk, loan structure, regulatory environment, and risk management practices. Successful direct lenders employ robust underwriting standards, adapt to changing market dynamics, and implement effective risk management strategies to optimize yields while preserving capital. By understanding the multifaceted nature of factors influencing yields on direct lending, investors can make informed decisions and navigate the complexities of this alternative investment strategy. If your firm is seeking ways to automate and optimize your direct lending processes, we invite you to contact us today to schedule an intro call and learn more about AXIS by AIO Logic!