Ed Miliband has urged Alok Sharma, the business secretary, to overhaul the government’s Covid-19 business lifeboat scheme following low take-up by small and medium-sized firms.

In a letter seen by the Observer, the shadow business secretary warned that thousands of companies were on the verge of collapse, and without a bigger commitment from the government were likely to go bust.

Ministers needed to acknowledge that the loan scheme for smaller businesses was bureaucratic, and the offer to underwrite 80% of loans was inadequate, he said.

Miliband, who was brought back into the shadow cabinet last week by Keir Starmer, the Labour leader, warned that unless the government agreed to underwrite 100% of all loans, banks would continue to reject applications from cash-strapped firms.

“The risks of doing too little, too slowly to help businesses are much greater for the long-term health of the economy than the risks of doing too much, too quickly,” he said.

The government has come under fire from business groups deluged with complaints from struggling firms. Many have either failed to get through to lenders or been rejected based on standard borrowing rules.

Most of the restaurant, hotel and leisure sector has been shut down along with much of the manufacturing sector and the travel industry. A scheme to pay staff who are sent home 80% of their salaries has prevented millions of people from losing their jobs, but employers argue that they must still pay other costs, which could tip them into bankruptcy.

Germany has shifted to covering 100% of all short-term, Covid 19-related loans made to small businesses while the Swiss government has streamlined its application process, forcing banks to use one standardised form.

Miliband said ministers needed to act swiftly because thousands of businesses were running out of cash. “The government should learn from other countries and consider increasing the amount that will be underwritten from 80%,” he said.

“This would expedite applications by removing or reducing the remaining risk borne by the financial institutions. In these extraordinary times and in the interests of the future of our small businesses, this is a step we should consider.”

Rishi Sunak, the chancellor, and Sharma have overhauled the Coronavirus Business Interruption Loan Scheme (CBILS) once since its launch three weeks ago, ordering lenders to stop asking small businesses for collateral, including the homes of directors, to cover potential losses.

This weekend, the Treasury announced an increase in the number of lenders taking part in the scheme. Sunak has also said privately that employers are taking up an increasing number of loans, with the figures to be published this week.