At the height of the dot-com boom, American Metrocomm Corp., a Louisiana phone carrier burning cash, was already interviewing bankruptcy lawyers. “There was no rhyme or reason that anyone in their right mind would loan them any money,” recalled Michael Henry, who later became Metrocomm’s chief executive.

But Cisco Systems Inc. was happy to help. The Silicon Valley networking giant extended more than $62 million in credit to Metrocomm, a lifeline that quickly translated into new sales of Cisco routers and switches.

Metrocomm wasn’t alone. Over the late 1990s, Cisco poured billions into shaky telecom firms through its financing arm, Cisco Capital. The loans weren’t gifts; they were a sales machine. Often the “credit” came in the form of Cisco gear itself, booked as revenue even before customers had made a single payment. By 2000, executives said such financing and leasing deals accounted for roughly 10% of Cisco’s $20 billion in annual revenue.

The strategy worked wonders while the bubble inflated. But as the telecom bust arrived, the risks became harder to ignore. In 2001, Cisco acknowledged that many of its customers were unlikely to repay and set aside nearly $900 million for bad loans.

One of those customers was Rhythms NetConnections, an Englewood, Colo., internet provider founded by a major Cisco shareholder. Rhythms was bleeding money from the start, losing $36 million on just $1 million in sales in 1998. Its IPO prospectus warned of years of red ink, and S&P rated its debt deep in junk territory. Still, Cisco shipped Rhythms $20 million in gear on credit just before the IPO in 1999 and kept financing it even as the stock collapsed. By the time Rhythms filed for bankruptcy in 2001, it owed Cisco more than $30 million.

HarvardNet, a Boston-based broadband provider, told a similar story. With less than $5 million in sales and a negative net worth by the late 1990s, it compared Cisco gear to rival Paradyne’s and concluded Paradyne’s technology was superior. But Cisco went straight to the top, offering as much as $120 million in credit, on terms that allowed deferred payments and even spending on non-Cisco equipment. HarvardNet’s leadership took the deal, and Cisco became its dominant supplier.

By early 2001, internal documents showed, Cisco had racked up financed-lease exposure of $1.3 billion across 735 customers, including $233 million tied to high-risk borrowers. What looked like a clever growth trick to inflate demand turned out to be the hard lesson that financing your customers is not real demand.