The shrinking economy, the rapid increase in unemployment and a weak pound have done the fashion sector no favours. Now the industry's recovery is being severely hampered by the actions of credit insurers, which have been withdrawing their support at a time when it is needed most.

According to figures released by the Association of British Insurers, the number of trade credit insurance claims in the last quarter of 2008 rose by 51 per cent, compared with the previous year.

Although the Chancellor recognised the devastating effect that this is having on businesses, the measures outlined in the Budget under the trade credit insurance scheme are too little, too late.

Fashion businesses were facing reduced or withdrawn limits towards the end of 2008, so a scheme that offers support for only those limits reduced and not withdrawn after April 1 this year does not extend far enough. In addition, the scheme is expensive, far more so than the French equivalent.

Credit insurers have continued to decrease the available limits across many sectors, but this trend is particularly worrying for the fashion industry, which relies heavily on credit insurance.

Any withdrawal leaves businesses exposed in terms of their trading relationships, both with customers and suppliers, but possibly of greater concern are the potentially catastrophic implications on their working capital, as has been demonstrated recently with some high-profile casualties.

One financially sound and thriving manufacturer found that its credit insurance had been completely withdrawn on its business via one of its suppliers. There had been no advance warning. The insurers had not contacted any party associated with the business to discuss its performance or financial position, but had clearly based their decision solely on their appetite for the sector.

In recent years, the reliance on invoice finance for working capital within the sector has increased and the asset-based lenders have increasingly refused to lend against uninsured debt. With the reduction or removal of insurance limits on customers, the ability for businesses to obtain the cash needed to survive is proving challenging.

Where previously insurers had little data during the boom years, small and medium-sized enterprises were often given the benefit of the doubt.

The opposite is now true. Businesses must communicate with the insurers and demonstrate their strengths - the more information available, the better.

Making sure that the latest management accounts are up to date and available, along with filing year-end accounts as soon as possible, will help - not least to avoid new, heavier fines for late filing introduced on February 1.

Clearly, some businesses in the fashion sector are not doing well: they are overstretched and should not be insured. However, the sweeping generalisation that all businesses in the sector are the same is clearly holding back recovery.

For the businesses that are doing well, the credit insurers must think again and initiate a dialogue or seriously rethink their business model.

Bobby Lane is a partner in Shelley Stock Hutter, chartered accountants, www.sshllp.com

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