A study by the Federation of Small Businesses found that small providers are facing significant challenges due to "increasing and unsustainable" business costs and a lack of government funding to provide free childcare for three- and four-year-olds.
It has called for the introduction of a new 100 per cent business rate relief scheme for childcare providers in England to reflect increasing cost pressures on the sector and for government to urgently review the amount of funding given to local authorities to fund the 30 hours entitlement.
In a report examining the threats to small childcare businesses, the FSB said rising costs and funding shortfalls have left many providers struggling to stay afloat.
Factors putting providers at risk include rising business rates, minimum wage increases, pension auto-enrolment, the underfunding of the 30 hours free childcare entitlement and mandatory training that isn't available outside core working hours.
The report calls on the government to follow Scotland's example and introduce 100 per cent business rates relief for childcare providers. It also calls on the Department for Education (DfE) to increase funding for its 30 hours free childcare scheme.
"The success of the 30 hours free entitlement depends on small childcare providers, which make up the majority of the marketplace, being able to provide an affordable, high-quality offer to parents," said Mike Cherry, national chairman of the FSB.
"But many are struggling financially, hit hard by a heady mix of rising business rates, operating costs and staffing costs, driven inadvertently by different ministerial decisions."
The FSB said business rates are a particular problem for childcare providers because they make low profits but have to operate in large spaces. "Like all small firms, many childcare providers are still reeling from last April's business rates revaluation," said Cherry.
"On top of utilities, rent and staffing costs, these businesses are trying to deal with huge business rate hikes placing significant pressure on their costs."
The FSB interviewed nine owners of small childcare providers for its report and found that the financial pressures were causing many to consider quitting the sector. Some are now halting investment in their business and charging parents for nappies, lunches and other extras to try to make ends meet.
The report also criticised how mandatory training courses for childcare practitioners were often unavailable outside core working hours. It also said the DfE should change the 30 hours free childcare entitlement rules so that parents who work shifts can access it.
"Parents that require more flexible childcare cannot benefit from ‘free' entitlement for those hours that are out of scope, and providers cannot offer this care," said the report.
Neil Leitch, chief executive of the Pre-school Learning Alliance, said: "This report paints a stark picture of a government policy that has left many small childcare providers struggling to stay afloat. As such, we welcome the FSB's recommendation of business rate relief, a move that would offer at least some respite to providers."
Purnima Tanuku, chief executive of the National Day Nurseries Association, said: "We welcome this research by the FSB which echoes our own findings and those of previous reports. With this large body of evidence, it's time the government listened, acknowledge the problem it has created and address it effectively.
"Nurseries in England are only struggling because government is now their biggest customer - but it isn't paying the going rate for this service and in many cases, doesn't pay on time."
Responding to the report, a Department for Education spokesman said: "We are spending more on childcare than any other government - around £6bn a year by 2020 - and our childcare offer means that eligible working families can save around £5,000 per child, per year. This includes an additional £1bn a year to deliver the 30 hours commitment and to increase the funding rates for local authorities to pass on to childcare providers."
Labour, however, has accused the government of underfunding the sector. "The research is yet more evidence of the Tories underfunding their childcare policies, something that is fast becoming obvious to everyone except government ministers," said Labour's shadow early years minister Tracy Brabin.
Brabin said a Labour government would provide 30 free hours of "properly funded" childcare for two- to four-year-olds. She did not say whether Labour would also introduce the 100 per cent business rate relief for childcare providers in England.
Scotland introduced full relief from business rates for childcare providers at the start of April. At the same time the Welsh Government introduced tapered relief from business rates for registered childcare premises with a rateable value of up to £20,500.
In January 2015 the DfE recommended English local authorities offer childcare providers full discretionary exemption from business rates, however the FSB report noted that this was unlikely to happen when councils are facing tight budgets.