The Labour Party is understood to have run up debts of 25 million, a figure that will rise over the next few months as disgruntled lenders demand their money back.
The Scottish Labour Party was hoping to have between 750,000 and 1 million to spend on its Holyrood election campaign. But although no final decisions have been taken by party managers in London, insiders have claimed that that it is unlikely that such sums will be available.
The Labour Party's National Executive Committee has not signed off the party's accounts yet and until it does, no decisions will be taken on where cuts will be made. However, with the Scottish and Welsh elections just nine months away, Scottish Labour sources fear that their campaign funding will be the first to suffer.
The Scottish Labour Party raises much of its money itself, some from unions and some from party members and branches. Most of this is then sent to London before being re-allocated. However, the Scottish party is suffering from a significant decline in its membership. The number of Labour members in Scotland is down, from 30,000 in 1997 and 23,000 in 2002 to just 18,500 today, which means there will be less from that source.
On top of this, there is the anticipated squeeze on funding from London. A Labour source said: "No decisions have been taken yet, but we know things are tighter than they were."
Adding to Labour's problems are the businessmen who lent money to the UK party and who now want their money back. Gordon Crawford, a computer entrepreneur has said he wants his 500,000 loan back with 6.5 per cent interest. Another donor has requested the return of 1 million.
A Scottish Labour Party spokesman claimed there was no funding crisis north of the Border because much of the money used for the Scottish election campaign is raised in Scotland. He said: "The Labour Party is in a stable financial position, despite the party fighting a General Election last year."
And a Labour source in London said that no decision had been taken yet on the final level of funding for the Scottish and Welsh elections, but he stressed that the party had been in a similarly "challenging" position financially after the last two General Elections, and still managed to finance the Scottish and Welsh elections. Parties are allowed to spend up to 1.5 million each on the Holyrood campaign but none have even come close to that figure yet. The biggest spender in 2003 was the Labour Party, with 727,832, followed by the SNP with 478,957.
The SNP is expected to have about the same amount to spend this time but Labour will suffer if it has to defend all its 46 seats and its four regional list MSPs with less money than last time.
Labour's annual accounts show a debt of 25 million, with the party suffering massively from a withdrawal of support following the "cash-for-honours" scandal.
Wealthy backers are staying away from Labour now and, last month, 2 million of the 2.9 million donated to the party came from trade unions.
In contrast, the Conservatives are doing well. The election of David Cameron as leader helped generate a 9 million windfall in the first quarter of this year.
A Scottish Tory spokesman said no decisions had been taken yet on funding for the Holyrood elections, but he did not anticipate any financial problems.