Circular Financing

Imagine a car dealer lending his customer 30,000 euros so that the customer can buy a 30,000-euro car from him. In the end, the dealer’s books show a sale. But in reality, he has merely sent his own money around in a circle. This exact pattern is what the term Circular Financing describes. A company invests money in a customer or partner, and that partner then spends it soon after on products from the very same company. This isn’t automatically illegal. It becomes problematic when it fakes growth that wouldn’t exist at all without these loops.

Why investors get nervous about circular deals

On the stock market, revenue counts as a hard number. It shows that real customers are willing to pay real money for a product. With Circular Financing, this assumption no longer holds. The revenue is technically correct from an accounting standpoint, but the company itself financed the demand behind it. Investors then end up paying for growth that cannot sustain itself on its own strength.

The risk lies in the chain reaction. As long as fresh capital keeps flowing into the loop, everything works. Once the financing dries up, revenues collapse abruptly. On top of that, the company loses twice over: it’s left holding a worthless stake and loses the customer at the same time. This exact double effect is what made the collapse of many telecom companies around the year 2000 so severe.

That’s why the term has resurfaced frequently in financial news since 2024. The trigger is the billion-dollar web of ties between chipmakers, data center operators, and AI companies. Critics see this as a warning sign of a bubble. Defenders counter that young industries have always been partly financed by their biggest suppliers.

How the money makes its round trip

The simplest case is a direct equity stake. A chipmaker invests a billion dollars in an AI start-up. The start-up uses the money to buy chips from that very same manufacturer. On the manufacturer’s balance sheet, the investment shows up as an asset and the chip sale as revenue. Both figures look healthy on their own.

More common are longer chains involving three or more parties. Company A invests in Company B, Company B rents computing power from Company C, and Company C in turn buys hardware from Company A for that purpose. The loop only closes across several stages. This makes it hard to spot from any single company’s financial reports. You have to lay the contracts of several companies side by side to see the pattern.

A related term is vendor financing, meaning supplier credit. Here, the seller simply advances the purchase price to the customer without taking a stake in them. This is a normal and widespread business model. It’s only called Circular Financing once the money returns to its starting point and gets counted there as new revenue.

How to spot these constructions

You’ll encounter the term most directly in reports about the AI boom. Whenever a corporation is simultaneously the biggest investor in and the biggest supplier to the same start-up, the term almost always comes up. Examples such as the ties between Nvidia, OpenAI, and Oracle have been discussed at length in the business press under this very label.

A practical warning sign is customer concentration. Publicly traded companies must disclose when a single customer accounts for a large share of revenue. If that customer also happens to be on the list of equity stakes, it’s worth taking a closer look. A second signal is a large gap between reported profit and actual cash inflow.

A common misconception is to assume Circular Financing equals fraud. In most cases, it isn’t. A supplier helping to build up a young industry is often acting in an economically reasonable way. The difference lies in transparency and in whether paying end customers exist at the end of the chain. If they’re missing, all that remains in the end is a loop with no floor beneath it.