More than 600,000 small businesses are on the brink as the return of tough Covid restrictions threatens to trigger a cascade of collapses, new figures show.

The second wave caused a sharp acceleration in the number of businesses deemed in “significant financial distress” at the end of 2020 as industry leaders called on the Chancellor to take action at the Budget.

Data from Begbies Traynor's Real Business Rescue pointed to a near 80,000 rise in firms in distress in the fourth quarter of 2020, a 15pc jump and a large share of the total 118,000 increase since the pandemic struck.

Economists and City leaders fear that a mountain of corporate debt could hold back the recovery if hamstrung firms cut investment and hiring. Insolvencies have been kept low by huge government support but are expected to rocket in 2021.

“At the Budget we hope the Chancellor looks for creative ways to help, such as converting some loans to tax liabilities, looking at employee ownership and extending the ‘Pay As You Grow’ model to debt facilities,” said Craig Beaumont, chief of external affairs of the Federation of Small Businesses.

“More than two-thirds of small firms are now carrying some form of debt, with 40pc of these saying the debt is now unmanageable.”

Nikola Dacic, economist at Goldman Sachs, warned that “recent data shows emerging signs of tighter credit for SMEs and rising insolvency risks”.

The warning came as the Bank revealed that businesses have been forced to raise £80bn from banks and financial markets to survive the Covid crisis.

It said in a Bank Overground blog post that accommodation and food businesses were the most likely to have borrowed with a quarter of limited companies using the government’s loan rescue schemes.

Start-ups and businesses in property, hotels and manufacturing have been hardest hit by the recent deterioration, according to Begbies.

Shaun Barton at Real Business Rescue said it is “vitally important” that help is given to small businesses.

“Without the millions of SMEs in the country, the UK will slow in its development of ideas and progress and the economy will further recess.”