Labour is urging Chancellor Rishi Sunak to ease the burden of Covid-related debt on business, warning hundreds of thousands of firms could go to the wall unless the Government acts.

Shadow chancellor Anneliese Dodds said companies were facing the prospect from next month of having to start paying back £71 billion in Government-backed loans intended to nurse them through the pandemic.

She said Mr Sunak’s insistence that the loans were repaid on schedule risked “crushing” any prospects of recovery under a “mountain” of unsustainable debt.

His economically illiterate plans ... risk crushing British business and our recovery under a mountain of debt

However, the Treasury said that it had already taken steps to allow for more flexible repayment terms.

Labour released analysis which, it said, showed that as many as 850,000 firms were at risk of closure over the next three months, with the potential loss of 2.4 million jobs.

Ms Dodds called for the creation of a new British business recovery agency to manage loans made through the Government’s coronavirus business interruption scheme so as to secure firms’ futures – including though employee ownership.

She said the Government should also convert the bounce back loan scheme into a “student loan-style arrangement” with firms only starting to make repayments once they are making money again.

“Labour would rebuild Britain by backing businesses and supporting families through the crisis and then putting Britain on the path to growth,” she said.

“The Chancellor simply offers a return to the same, old policies that left the foundations of Britain’s economy weakened before the crisis.

“His economically illiterate plans to demand repayments next month risk crushing British business and our recovery under a mountain of debt.

“He would leave taxpayers on the hook for billions and other firms cash-strapped for years – leading to less investment and fewer jobs.”

A Treasury spokesman said: “Our loan schemes have provided a lifeline to thousands of businesses across the UK – helping them survive the outbreak and protecting millions of jobs.

“But we know businesses need every pound to protect jobs rather than repaying loans, which is why in September we announced flexibility on repayments for both the bounce back loans and coronavirus business interruption loans schemes.

“For bounce back loans that now means businesses can choose to make no payments on their bounce back loans until 18 months after they originally took them out.”