The bankruptcy of Circuit City is a chilling foretaste of what could await us in Britain. Two years ago, the second-biggest electronics retailer in the United States was worth more than $5 billion. Yesterday, the equity was wiped out. It has already axed 6,800 jobs. The fate of the remaining 40,000 is uncertain.

Circuit City’s struggles in recent weeks show how quickly the credit crunch can squeeze the life out of a company. It also highlights how a crisis of trust is spreading from the rarified world of collateralised debt obligations into the mundane business of television retailing.

Circuit City was squeezed on all sides, by demand, supply and finance. Most of its customers buy on credit cards and as banks have pulled back their lending, consumers have pulled back their spending.

Britain’s consumer boom has been fuelled by ballooning credit card debt. We have yet to see the rise in credit card bad debts already evident in the US. But British banks believe it will surely come and are cutting back credit lines.

For Circuit City, the killer blow came not from customers but from suppliers. As manufacturers became increasingly worried about the company’s ability to pay, they started to demand upfront payment for all goods before they were shipped.

This put intense pressure on the company’s working capital, which in turn added to suppliers’ concerns about its survival. They were right. Both Hewlett Packard and Samsung are now owed more than $100 million.

Weaker British retailers say that they are also being squeezed by suppliers, who are requesting upfront payment.

Given their own problems, banks are loath to put new money into companies with such working capital problems. Circuit City’s lenders, led by Bank of America, agreed to provide $1.1 billion to keep its doors open. But only after it went into bankruptcy and only on condition that it was used to pay off their existing loans.

Some struggling companies may hope to attract money from private equity, but, as one of Europe’s leading private equity executives told me yesterday, many of the firms will not have enough money to support their own struggling investments, let alone new ones.

If things are bad for big companies, they are worse still for the small fry. The evaporation of small-business lending is much more important to the economy than whether a few mortgage payers get the full benefit of last week’s rate cut.

Peter Mandelson will urge banks today not to cut off the oxygen supply to small businesses. Otherwise, countless British companies will go the way of Circuit City.

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