New scheme will underwrite up to half of potential claims for medium-risk firms with reduced cover

Thousands of companies struggling to secure critical business insurance could be saved by a government scheme worth billions, according to reports.

The widespread withdrawal of credit insurance, which enables firms to trade with one another without fearing unpaid bills, has hit tens of thousands of smaller businesses in recent months.

The Times said that the government would announce later this month a scheme to be offered to medium-risk companies whose cover has been reduced but not withdrawn entirely. The government would underwrite half a potential payout, and the credit insurer other half.

The government scheme would be administered by credit insurers, said the Times, with an overall cap of £5bn placed for total claims under consideration.

Business leaders have warned that the growing cancellation or refusal of credit insurance, which is called on to compensate the policy holder for goods or services it has provided if the buyer is unable to pay, could be as damaging as the credit crunch.

Around two-thirds of credit insurance customers are small businesses, with many in the construction sector already facing longer payment periods stretching to 120 days.

The total value of claims across the credit insurance sector as a whole rose by 58% in the third quarter of 2008, compared with 2007, reaching nearly £100m, according to the Association of British Insurers.