For a lending company, if they are asking for a 10% yield on a 1 year loan they are providing. Is it possible to have a 5-6% IRR. And is this 5% IRR acceptable to the company disbursing the loan?
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Yes, it is possible for the IRR to be lower than the interest rate. So long as the contractual interest is paid (that would be the 10% here), the lower IRR would be due to capital depreciation in the loan itself; in other words, the borrower paid back less than the face amount of the loan. To provide an example, if the lender lent $100 at a 10% interest rate, then the borrower must pay back the $100 loan + the $10 of interest. Say the borrower successfully paid back the $10 of interest. For the IRR to be around the 5-6% you mentioned, then it will be because the borrower paid back less than $100. Play around in excel with the payments and timing to find out how much less the borrower would have to pay back to match the 5% IRR. As for whether a lender would find this acceptable, probably not unless for whatever reason they already expected the capital loss.
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