An annual survey commissioned by the Independent Children's Home Association (ICHA) found that 45 per cent of providers were "worried about their future in residential care".
In addition to this, 10 per cent said they "cannot see a future in residential care".
The survey, based on responses from 79 providers, found that concerns are present despite the number of referrals to children's homes increasing.
A total of 61 per cent of providers reported an increase in referrals compared with just 13 per cent reporting a decrease.
Providers also reported anecdotally that the complexity of need or degree of difficulty of children being referred is also increasing, but often a lower fee rate is requested by cash-strapped local authorities.
The situation appears to have had an impact on profitability for homes, with 42 per cent reporting a drop in profit compared with a year ago, with 27 per cent saying it stayed the same and 31 per cent reporting an increase.
Jonathan Stanley, chief executive of the ICHA, said the children's homes sector is "in peril".
"We reported the same damaging features last year," he said.
"This report shows the situation is has worsened.
"This is a time for teamwork dedicated to sustaining and improving the sector.
"The message has got to get through; changes are needed to funding, regulation and commissioning."
"There needs to be a different approach."
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