The network, which represents grant-giving foundations across the country, said its members had witnessed a vast increase in the number of applications from small charities and community groups in the past year.
It said this was a direct result of central and local government's growing tendency to replace voluntary sector grants with public service contracts.
"A perverse consequence is that it is driving up the costs of organisations such as community foundations," said Stephen Hammersley, chief executive of the network. He said community foundations and other trusts might soon have to meet the rising cost of processing more and more applications out of their grants budgets. "It will happen," he said.
Private individuals could also be put off from making large philanthropic gestures if they find themselves deluged with applications, Hammersley said. What would otherwise have been a pleasurable experience could easily turn into the nightmare of having to turn lots of people away, he added.
The network has formed a coalition with 10 other charities, including Navca, the umbrella body for local voluntary sector infrastructure bodies, the Directory of Social Change and the Women's Resource Centre, to impress on government the importance of small grants. Other members include the Scarman Trust and Clinks, the umbrella organisation for probation charities.