The stationery chain Paperchase has come under mounting pressure after one of its main credit insurers reduced cover after a slump in profits.

Euler Hermes has refused to cover new contracts with Paperchase’s suppliers, although the retailer’s existing agreements with suppliers are unaffected.

The move follows a similar row over insurance cover at the struggling department store chain Debenhams, which has fought off claims that it is about to go bust after it was refused cover for new contracts. A withdrawal or reduction in cover can mean that suppliers demand payment upfront, putting a strain on cash reserves.

A number of well-known high street retailers have struggled this year as weak consumer spending has led to business failures, mass store closures and tens of thousands of job losses. Paperchase’s profits before tax plunged 88% to £613,000 in the year to 28 January, according to accounts filed at Companies House.

Paperchase, which sells greeting cards, stationery, quirky mugs and other accessories, is owned by the private equity firm Primary Capital, which backed a £20m management buyout of the UK retailer in 2010 from the bookseller Borders UK, which collapsed into bankruptcy.

At the time, Paperchase, run by Timothy Melgund, had 65 standalone stores, along with 35 concessions in House of Fraser, Selfridges, Harrods and Waterstones. It expanded rapidly under new ownership , opening 75 stores in the UK, and now employs about 2,000 people.

Primary Capital, which has also owned Yo Sushi and Coffee Nation in the past, tried to sell Paperchase in 2014 and considered a stock market flotation two years later.

Paperchase told the Sunday Telegraph: “We are disappointed Euler Hermes has reduced credit insurance. We don’t think it is fair and we think they should reverse it. There is no cash issue. We have been around for 50 years and plan to be for another 50.”

The company was founded in 1968 by Chelsea art students Judith Cash and Eddie Pond. The highstreet retailer WH Smith invested in the firm in 1985 before a management buyout by Melgund and a business partner backed by Graphite Capital in 1996. It was bought by Borders in 2004 for £18.7m.