circular financing

advancedwidespread

A business loop in which a company gives money to its own customer, who then spends that money buying from that same company.

In plain terms

Imagine that the baker lends money to the neighbor's coffee shop, and the coffee shop buys croissants from him with this money. In the baker's accounting, nice revenue appears, but most of the money started from his own pocket. This is the essence of circular financing: money circulates among a few players, and at every stop it looks like revenue or investment.

In the AI industry this became a topic because running large models takes a huge number of chips and data centers, which cost astronomical sums. Chipmakers and cloud providers therefore invest in AI companies, which spend the money they receive on chips and computing capacity, often from the very investor.

This is not fraud in itself, nor necessarily a bad idea: infrastructure is built faster this way than if everyone managed from their own revenue. The problem is that it is difficult to determine from the outside how much is genuine demand from external customers and how much is demand created by the players for each other.

How it works

A supplier (e.g., chip manufacturer or cloud provider) gives money, credit, or equity to an AI company that is also its customer.
In a long-term contract, the AI company commits to buying chips or computing capacity, often from the same supplier or its partner.
The supplier records the purchase as revenue and its stake in the AI company as an investment, so the numbers grow on both sides.
Better numbers can lift stock prices and company valuations, enabling further investments and loans, and the cycle begins anew.
The cycle can be sustained as long as real paying users and companies generate sufficient revenue at the end; if this fails, multiple participants in the chain may face trouble simultaneously.

An everyday example

You read in the news that a chipmaker is preparing to invest tens of billions of dollars in an AI company, which at the same time announces it is ordering chips of a similar magnitude from them. The chipmaker's share price and the AI company's estimated value both rise, even though little new external money has entered the system. If you have a stock fund or pension savings, you are likely affected by the shares of listed players.

Who is affected

bank customer, investorMajor technology stocks carry significant weight in most index funds and pension savings, so a break in this cycle could also affect your savings. → Money

entrepreneur, executiveIf your company relies on an AI provider, you must know that its cost and stability depend partly on such financing chains.

employeeThe momentum of AI investments creates and eliminates jobs, and if funding stalls, layoffs can be felt beyond the technology sector. → Work & HR

A common misconception

MythCircular financing is the same as fraud or a pyramid scheme.

In realityMost such deals are public and legal, backed by real chips and data centers. The risk is that demand appears larger than reality, and the fates of the players become too intertwined.

Limits and risks

Announced amounts are often statements of intent valid for several years and subject to conditions, so they are not the same as money actually paid out.
It is difficult to distinguish from the outside what portion of a company's revenue comes from customers it finances itself.
If a major player in the chain cannot pay, the loss ripples through the others because they are each other's customers, investors, and lenders simultaneously.
The fact that a deal is circular does not imply a bubble: it depends on whether there will be enough genuine end-user revenue.

Similar, but not the same

supplier financing – In the traditional version, the seller simply grants the buyer credit or deferred payment so they can buy the product. In the circular version, the seller typically also acquires an equity stake in the buyer; the money often returns to the seller through several parties, inflating the figures at every step.
pyramid scheme – A pyramid scheme is intentional fraud: earlier entrants are paid from the contributions of new ones, without real business revenue. Behind circular financing, however, there are real assets, services, and public contracts.
AI bubble – The bubble refers to the entire overvalued market, while circular financing is just one mechanism that can fuel it.

Related concepts

Broader

AI investment wave, corporate financing, venture capital

Narrower

supplier financing, cloud credits, purchase in exchange for shares

On the edge

AI bubble, data center, GPU, computing capacity, hyperscaler

A brief history

The phenomenon is known from the dot-com bubble around 2000, when telecommunications equipment manufacturers lent money to their own customers, and many of these loans defaulted. In the AI industry, it became a topic of public debate in autumn 2025, when Nvidia indicated in a letter of intent that it would invest up to 100 billion dollars in OpenAI, one of the largest buyers of its chips. This was not a final contract, and the plan did not materialize in this form: in 2026, Nvidia invested a much smaller amount in OpenAI's capital raise.

Where things stand

As of late 2026, it is a standard element of major AI infrastructure investments and one of the main points of debate for analysts and investors. It remains an open question whether end-user revenues will justify the cycle.

Status: 2026 November

Also known as

circular financing · circular transactions · circular financing · circular financing · circular deals · circular investment

Sources

Wikipedia: AI bubble

This entry was machine-edited and has undergone machine expert review; the “In the news” section updates automatically from Agent Age stories.