An evaluation commissioned by the Department for Education found that 48 per cent of private providers suffered a decline in profits compared with 18 per cent who reported increased profits. Across all types of childcare provider, 40 per cent saw a drop in profits while 22 per cent saw profits rise.
Despite this, the evaluation concluded that the financial implications of the 30 hours policy did not threaten the success of the policy, which is due to be rolled out across England in September 2017.
The evaluation, which examined the outcomes of the policy in the eight early implementer authorities that adopted the policy in September 2016, advised that better business support could help providers address their concerns about the financial viability of offering additional hours.
However, childcare provider associations said the findings underline the need for the government to increase funding for providers.
Purnima Tanuku, chief executive of the National Day Nurseries' Association (NDNA), said the evaluation highlights the challenges facing nurseries in delivering 30 funded hours, but then "fudges" the conclusion with the assertion that there is no reason the scheme "will not be a success".
Neil Leitch, chief executive of the Pre-school Learning Alliance, said: "With nearly 50 per cent of private providers reporting a decrease in profits, and many early implementers warning they are likely to limit the number of ‘free' places due to concerns about financial viability, it is abundantly clear that more investment is needed.
"Ultimately, if these vital funds are not made available, we will see more providers closing their doors, more parents unable to access ‘free' childcare, and more children missing out on valuable early years experiences."
The evaluation also advised the DfE to improve its guidance on providers' ability to charge parents for extras, such as meals, when they access the free entitlement.
It found that one in seven early implementer providers had done this but there was confusion among providers, parents and local authorities about what was permissible due to "grey areas" in the government's guidance.
Tanuku said providers need clarity on the issue: "NDNA has urged the DfE to allow nurseries to charge parents for meals and other extras as a condition of a place in order to make this work, but so far has been rebuffed. Instead, providers and local authorities have to walk a tightrope to keep their businesses sustainable."
The evaluation was carried out by researchers from Frontier Economics, NatCen Social Research and the University of East London.