Shares in ScS Upholstery, one of Britain’s biggest furniture retailers, plunged 46 per cent today as it revealed that a credit insurer was refusing to cover suppliers who are worried about not being paid by the business.

ScS said that some of its biggest suppliers had been affected by the move and that it was trying to negotiate new financing options to ensure adequate stocks.

ScS, along with its rival Land of Leather, has been one of the hardest hit UK retailers by the fallout from the credit crunch. In a trading statement on May 10, ScS said it had just under £5 million of cash left in the bank.

Sanjay Vidyarthi, an analyst at Dresdner Kleinwort, said: “The crisis in confidence in both ScS and its suppliers clearly makes a bad situation worse and will send shock waves through the sector. The outcome is impossible to predict at this stage, we think ScS can survive this, though its chances just got seriously worse.”

ScS shares fell 13.50p to 15.75p today, giving the business a market capitalisation of around £6 million.

David Knight, ScS chief executive, said the retailer was in talks with the credit insurer and its suppliers to try and resolve the situation. He insisted that Barclays, the retailer's bank, was being "supportive". ScS has still not used any of its £3 million overdraft facility.

Mr Knight said: "The situation has not changed from the statement we made in mid-May. We are working through what is a very difficult trading environment at the moment. We bank with Barclays who have told us they will be supportive.

"What we have is a good business. The difficulty is that the consumer is feeling challenged about their spending power. We are looking at costs to get through the next period."

Credit insurers cover suppliers in a range of industries against the risk they will not be paid. A decision to refuse cover is taken as a sign the insurer believes a business could be in financial difficulty.

Euler Hermes, the biggest credit insurer in the world, told The Times this month that, given the consumer slowdown, there was a 15 per cent higher risk of retailers defaulting on payments to suppliers than a year ago.

It confirmed that it had refused to provide cover to companies supplying a number of retailers but refused to reveal the identities. However, Land of Leather has said that Euler Hermes had withdrawn cover to those supplying the chain.

An estimated 14 firms supply ScS and it is understood that five are affected by today’s decision.

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