Cash-strapped suppliers will struggle to stay afloat as a “credit crunch within the credit crunch” threatens the entire food chain.

This was the stark warning from experts across the industry, who also claimed supermarkets’ lengthening trade terms over the past three years would make matters worse. Supermarkets have extended payment times to suppliers from 20-30 days three years ago to up to 90 days now.

“This is a really serious working capital issue for supermarket suppliers,” warned Duncan Swift, head of the food and agribusiness recovery group at Grant Thornton. “The credit crunch is exacerbating this, and with the banks removing or lowering suppliers’ facility limits just as the need to use these facilities is rising, it creates a credit crunch within the credit crunch.”

The warnings come as shares in ice-cream manufacturer Hill Station were suspended on the AIM as its market adviser and financial director resigned. The company warned in April 2008 that its working capital loan facilities had been reduced, and is now seeking new facilities.

Companies across the sector, both producers and suppliers, are facing pressure as their working capital is squeezed from all sides. Input costs remain high, while the cost of debt is increasing. With many suppliers paying high monthly repayments on debt and facing falling volume sales, liquidity is under pressure. Standard & Poors revealed on Thursday it had reduced the credit ratings of 11 European consumer goods companies and upgraded only three. The situation is made worse by banks’ unwillingness to lend given the current financial crisis.

“Banks have very little spare money at the moment,” said McQueen MD Shaun Browne, “and so are reluctant to lend to anyone. If you have a facility coming up for renewal, it’s no longer a formality but may be a significant hurdle. Banks may not renew, may increase the cost of borrowing, or require companies to borrow from several lenders.”

Bankers confirmed that companies with existing debt were likely to need to extend their borrowing over the next year. “Supply and demand are working against lending,” said a senior banker. “Banks are looking to retain liquidity, so it’s getting more difficult to access banking facilities. Within the food market, any company that has an existing borrowing requirement is going to need to increase it.” Swift warned that producers and low-tier suppliers should reconsider the creditworthiness of customers, or else risk folding if their customers struggled. When Lyndale Foods went into administration in June, Anglo Dutch Meats, one of its suppliers, was forced to do the same as it ran out of cash.

“Businesses that have bought complementary firms or competitors with cash, using debt financing, could be vulnerable,” he said. “Suppliers to those businesses have got to revisit the credit worthiness of their key customers. It’s important to make sure you’re not over-exposed to any client – in these times companies should be applying tight trade credit control. It’s likely over the next 12 months some companies in the sector will see their trade credit ratings further downgraded.”