Circular Financing

Circular financing is a loop where a company lends money to or invests in a customer, and that customer then turns around and spends that same money on the company's own products or services.

Picture a convenience store owner lending a customer 10,000 won, and the customer walking right back in and spending that same 10,000 won on store items. The store's books show 10,000 won in sales, but no new money actually came into the business—it's the same money making a round trip back to where it started. The trouble is that on paper, this kind of sale is indistinguishable from a sale driven by genuine customer demand.

When this pattern grows large enough, investors start to wonder whether a company's growth reflects real demand or just its own money cycling back through an intermediary. There's also a risk that if the borrowing customer's business falters, both the loan and the revenue it generated could collapse together. Telecom equipment makers in the early 2000s inflated sales through similar arrangements before crashing along with the dot-com bust, which is why the same label of concern keeps coming up around today's massive AI-related investments and financing deals.

In news coverage, it shows up in criticism like: "NVIDIA invests in companies like OpenAI and even backs the financing for their data center construction, while those same companies turn around and buy NVIDIA chips—isn't that circular financing?" A common misunderstanding is that circular financing automatically means fraud or something illegal. It's closer to a structure that blurs the line between revenue driven by real demand and revenue driven by cash simply cycling back, raising doubts about sustainability.