The telecom sector’s recent problems have been widely discussed, but more bad news is coming to light: some of the industry’s meteoric growth was propelled by financing that equipment providers extended to high-tech and telecom start-ups that are now having difficulty making their payments or, like Winstar Communications, have spectacularly collapsed. Consequently, the earnings of the equipment providers, such as Cisco Systems and Lucent Technologies, are also suffering.

The problem is hardly confined to the telecom sector. Xerox, for example, is struggling under the burden of the $11 billion it borrowed to help customers purchase its products. Managers in all kinds of industries assumed that if the cash on hand or the future cash flows of high-tech start-up companies were not sufficient to finance their purchases of needed equipment, the capital markets and private equity firms would cooperate. But investors abandoned that faith many months ago.

How can vendors protect themselves in the future? It probably isn’t necessary for them to drop the practice of financing their sales, but they will need to scrutinize borrowers more closely and to adopt better risk-management techniques.

During the good times, companies like Lucent and Nortel Networks expanded their vendor financing at nearly...