National League chiefs are due to speak with clubs this week on a vote that could scrap the rest of this season.
The government has told the league that the £11m funding to cover expenses from January to March is in the form of loans not grants.
An overwhelming majority of the 66 clubs say they will not accept loans.
The number of clubs willing to continue playing despite receiving virtually no income is likely to be so small that continuing the season will be unviable.
The Department for Digital, Culture, Media and Sport (DCMS) has already said claims that it has gone back on grant funding promises are “untrue”.
Officials and clubs have tried to exert pressure on the government, but there is no indication its stance is going to change.
Unless it does, it appears there will be little option other than to terminate the three leagues – the National League, National League North and National League South – which one well-placed source saying the league is “in a mess”.
National League North and South are both currently paused for two weeks, while the National League is continuing for the moment.
At the centre of the issue is the discrepancy between the National League and DCMS versions of a key meeting around the whole funding issue.
When they agreed to start the season in October, National League clubs thought a promise of funding, which started with £10m from the National Lottery for the period up to the end of December, was to cover the entire season, not just the first third of it.
However, after speaking to numerous sources about the key conversations that did take place between government officials and representatives from the National League and Football Association, BBC Sport understands that neither the words ‘grants’ or ‘loans’ were used – and that differing interpretations have been put on the phrase ‘future funding’.
The National League believed that would be a continuation of the National Lottery agreement, with clubs acting as a promotional vehicle, or a central grant.
It says clubs would not have even started the league had they known it would involve loans.
DCMS rejects that view and feels the £11m on offer is upholding its funding pledge.
It is understood National League board members and FA officials were aware of the impending problem in early December, before the third and final installment of the £10m paid to clubs – the format of which has itself been the subject of major controversy and an independent review by former FA chairman David Bernstein.
Some of the findings of the review have been described as “unworkable” by more than one National League official. But Bernstein was furious when the recommendations – specifically around the allocation of money – were ignored and called the review pointless.
It had been anticipated funding would be allocated according to average crowd size. But the National League board decided to change this at a late stage, reducing the anticipated amount received by some clubs by thousands of pounds.
The government reacted with disappointment to this, although as Camelot, the National Lottery organiser, is not a public company, it opted not to step in.
A number of clubs who lost out significantly have threatened legal action against the National League, which, it is understood, was preparing to amend the payment allocation in January, having decided not to do so in December on legal advice because Bernstein’s review was released so close to the next payment date.
Helen Grant MP referred to the situation in a statement to MPs on Tuesday afternoon, saying the National League’s distribution model was “flawed”, adding “the botch has left many National League clubs in dire financial circumstances”.