How AI Is Influencing Borrowing Costs and Credit Markets in 2026
- 4 days ago
- 3 min read
In the first quarter of 2026, a notable shift has emerged in credit markets: borrowing costs for certain borrowers are rising, and lenders are sharpening their scrutiny of new deals, particularly where uncertainty around artificial intelligence (AI) looms largest. While much of the market commentary focuses on large software firms or leveraged loan indices, the underlying forces are already influencing how lenders view credit risk across sectors that matter to lower-mid-market businesses.
AI: From Productivity Opportunity to Credit Risk Factor
Artificial intelligence continues to reshape industries, but it is also complicating how lenders assess long-term business viability. In markets like software and technology services, where debt financing is common, lenders are increasingly questioning which business models are AI-resilient versus which might face disruption.
Recent reports show that software companies are delaying or pausing debt deals as higher borrowing costs and tighter evaluations from lenders take hold, driven in part by fears that AI will undercut traditional revenue streams. This has led many borrowers to reassess the timing and structure of their debt financing.
For lower-mid-market businesses that are not pure tech plays but still compete with or serve tech-dependent customers, such as business services, outsourced IT, or SaaS-enabled operations, the shift in lender risk appetite matters. Lenders are applying this same lens: how exposed is the business to the accelerating pace of technological change and competitive disruption?
Credit Markets Are Paying Close Attention
Beyond headlines about tech stocks and AI hype, private credit markets, which have become a major source of capital for non-bank borrowers over the past decade, are now navigating a feedback loop of risk premiums, redemptions, and portfolio re-evaluation. Prominent private credit managers have publicly acknowledged that fears over AI’s impact on future earnings are influencing investor sentiment and deal terms.
Even as some firms differentiate themselves (for example, by consciously managing exposure to software and other high-volatility sectors), the broader message from capital markets is clear: lenders are prioritizing quality, transparency, and defensible risk profiles. This includes looking past projected growth rates and drilling into how businesses will generate stable cash flows ten years from now, especially in a world where AI could lower barriers to entry or compress pricing in certain industries.
What This Means for Lower-Mid-Market Borrowers
For owners and executives of $3M–$30M revenue companies, the implications are practical and actionable:
1. Storytelling matters more than ever.
Lenders want narratives that tie cash flow projections to real competitive moats, not just product roadmaps. Illustrating how your business is insulated from disruption — or how it uses technology like AI to enhance competitiveness rather than disrupt its business model can make a meaningful difference in pricing and terms.
2. Understand what credit markets prize right now.
Term sheets increasingly incorporate tighter covenants, performance triggers, and structural protections when lenders perceive uncertainty. Preparing for these demands before you engage can reduce negotiation friction.
3. Do not wait for a “perfect market” to borrow.
As with our previous discussion of working capital, financing environments can swing quickly. Companies that lock in capacity and align lenders early — before volatility peaks — often secure better outcomes.
A Strategic Capital Lens
This dynamic does not mean that credit is unavailable for lower-mid-market companies — it means that the criteria and expectations are shifting.
Businesses that are clear on:
how they fit into their competitive landscape,
how their revenue and cash flows are defensible, and
how they are positioning technology as a tool to support growth
will find a stronger footing with lenders. And where capital markets are tightening, creative financing structures — including private credit, unitranche facilities, or hybrid solutions — often deliver the flexibility smaller companies need.
At Tzortzis Capital, our role has always been to help business leaders prepare for these moments: ensuring that leadership teams present a compelling credit story, understand market timing, and adopt structures that support growth without sacrificing optionality. In 2026, with AI reshaping risk perceptions in credit markets, this kind of strategic readiness is no longer just an advantage; it’s a differentiator.
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