Credit insurer Euler Trade Indemnity is reporting a steep rise in the number of claims for bad debts and business failures, raising fears that the UK is heading for recession.

Policyholders have made 888 claims for the first quarter of year, the highest since the first quarter of 1999. Euler's quarterly financial trends survey found the fall in company profits had accelerated, despite a slight decline in interest rates recently.

Running in parallel to this decline in profits was a sharp rise in payment delays. The survey reported payment from customers was on average 25 days late, which many respondents attributed to cash-flow problems.

Companies were discounting list prices faster than at any stage since 1993 to win business, while their costs had been rising steadily over the past 18 months to two years. Business activity recorded its first fall since 1998's fourth quarter. Total order books recorded their lowest figure since 1992.

“Company profits have dipped in the first quarter in services, manufacturing and distribution,” said Euler's chief economist William Simpson. “Culprits appear to be the duration of higher energy and labour costs, as well as a record amount of price discounting.”

However, he added, orders had fallen, while the number of cancelled orders rose. Interest rates were actually aiding profits, “suggesting something more serious is going on”.

Simpson warned: “Loading up businesses with new costs is potentially dangerous at this stage.”