Prime Minister David Cameron was "mesmerised" by the Kids Company boss Camila Batmanghelidjh and over-ruled concerns raised, it has been claimed.
A senior figure involved in funding talks with the high-profile charity told the BBC's Norman Smith: "We were all over-ridden by Number 10."
Kids Company, which faces accusations of financial mismanagement, is expected to close its services at 17:00 BST.
It was given a £3m government grant a week ago.
Measures are being put in place to support children who use the charity, which supports deprived young people and their families.
On its Facebook page, Kids Company criticised the "media frenzy" and said the "collective focus" should be children's welfare.
The source suggested officials and ministers at the Department for Education had repeatedly expressed opposition to continued funding for the charity because of concerns about its performance and management.
It is suggested such concerns were expressed as far back as 2012.
But, the source added: "She (Ms Batmanghelidjh) was a good news story for the Conservative Party. It was a case of glamour over substance."
Separately, a former adviser in the last Labour government told the BBC he raised concerns about Kids Company in 2007, saying there was a "cult of personality" surrounding Ms Batmanghelidjh.
The adviser claimed the then Prime Minister Gordon Brown intervened personally to safeguard funding for the charity.
Who is Camila Batmanghelidjh?
- Camila Batmanghelidjh was born into a wealthy family in Iran. She arrived in England aged 12 and started at the private Sherborne Girls school speaking little English
- She gained a first-class degree from Warwick University and then trained as a psychotherapist in London
- She founded Kids Company in 1996 and has been its chief executive for 19 years
- The charity has branches in London, Bristol and Liverpool, aiming to provide practical, emotional and educational support to some of the most deprived and vulnerable inner-city children
- She has won an array of accolades and awards, including a CBE and a series of honorary degrees and fellowships from universities including UCL and the Open University
- She was listed among the UK's most powerful women by BBC Radio 4's Woman's Hour in 2013
Read more: Profile of Camila Batmanghelidjh
It was finally paid when Ms Batmanghelidjh agreed to step down to take up a new advocacy and clinical role.
She denied claims the charity had been mismanaged and that this had led to government pressure for a restructure.
Newsnight policy editor Chris Cook understands attempts are being made to recover the money because the Cabinet Office believes that the conditions attached to its use of were not met.
He said the charity appeared to have used some of the cash to pay staff - a day-to-day cost for which officials say it was not intended.
On Tuesday afternoon government officials, charities and local authorities were briefed on the likely impact of of the charity closing its services, he added.
Lambeth Council in London said an under-fives afternoon club and an adventure playground that are run by Kids Company would be reopened "as soon as possible".
Another London council, Southwark, said it was "ready to support any vulnerable children and young people in the borough who are affected by the closure of Kids Company".
London mayor Boris Johnson told the BBC he was a "huge fan" of Ms Batmanghelidjh and that it was "a great shame" the charity "doesn't seem to be working", while Bristol mayor George Ferguson said he was asking for an immediate briefing on the charity's future so a "safety net" could be prepared.
Esther Keller, director of Kids Company services in Bristol, told BBC Radio 4's the World at One the charity had been "audited to death" over its government funding.
She said some of its largest donors had expressed fears about Ms Batmanghelidjh leaving and that "it wouldn't be the same charity any more".
She accused politicians of "hiding behind charity", adding: "What they're not actually saying is that the lack of funding to statutory services has left children and young people in a very, very vulnerable state."
Earlier, former children's minister Tim Loughton said he had raised "serious concerns" over whether funding represented value for money when he was in government but the "decision was taken out of our hands".
He told BBC Radio 4's Today programme: "This was a large amount of public funds, it was the second largest grant I think I was responsible for in the Department for Education and they really did need to justify how the money was being spent."
Acting Labour leader Harriet Harman called on the government to publish a report into "funding decisions they have made in regard to Kids Company, and on what basis".
Vulnerable people "must not suffer as result of the breakdown of government confidence in Kids Company", she added.