Dozens of small groups have already gone to the wall and major national providers have shed hundreds of jobs since the start of this financial year, it emerged this week.
The scale of the crisis came to light in an Institute for Employment Studies report which shows how the revised funding structure for training programmes, introduced last April, hits people with special needs who will take longer to find work.
The report called Winners and Losers, commissioned by a group of the largest agencies and training and enterprise councils, reveals many providers cannot afford to operate under the new system which rewards the swiftest possible move by trainees into employment. Among the trainees affected are those with disabilities, learning difficulties or former offenders who are seeking qualifications.
The problem is made worse by a dramatic drop this year in TEC funding of courses, down by more than a third for training programmes for adults. TECs and providers say the higher training costs of FE courses than of their own work-based routes strengthens their case for more cash.
Eight of the 33 training centres run by the National Association for the Care and Resettlement of Offenders have closed since April with the loss of 300 jobs. Association officials link the cuts to changes in the funding mechanism for Youth Training and Training for Work.
The report offers the first hard evidence of the dire consequences of changes in training funding warned of in an earlier survey.
That study, titled Opportunities Knocked: Training Needs Neglected, sounded alarm bells over Government moves to shift the emphasis of schemes from qualifications to rapid employment routes.
Under the new policy, providers of programmes for adults no longer receive money for each week of training, plus extra cash for each national vocational qualification achieved. Instead, they are given just a quarter of the funding at the start of the scheme. The rest is paid when the trainee earns a qualification or finds work.
TECs in the surveys reported providers were becoming more selective, preferring to cream off those trainees most likely to move quickly into employment and rejecting those hampered by learning difficulties or language barriers.
"We are actually left in the adult training programme with training those who are job ready - the white, the bright and the trouble-free," said Anne Weinstock, chief executive of Rathbone CI, a major voluntarysector provider and one of the agencies commissioning the report.