Vendor financing

Vendor financing is when a company helps pay for its own customers' purchases. Instead of the customer raising money elsewhere, the seller lends to it, invests in it, extends long payment terms, or guarantees its debts or leases, and the customer then spends that money on the seller's products. When the money loops back as revenue this way, it's often called circular financing.

Done in moderation, it's a normal sales tool. It lets a supplier win customers who can't yet fund large purchases on their own, and a stake in a fast growing customer can pay off in its own right. The risk is that part of the supplier's revenue is then funded by the supplier itself, so sales can look stronger than the outside demand behind them. If those customers struggle, the supplier gets hit twice: the orders stop, and the loans, investments or guarantees it extended lose value at the same time.

The classic warning is the telecom equipment boom of the late 1990s, when equipment makers lent heavily to young carriers that bought their gear, and both sides suffered when the carriers couldn't pay. To judge vendor financing, look at how large the commitments are compared with revenue and cash, how much of revenue comes from customers the company has funded, and whether those customers have other ways to pay. Commitments are usually described in the notes to the financial statements rather than on the face of the income statement.