The veterans' charity has started the process of making 27 posts redundant in the Erskine Furniture social firm at Bishopton, Renfrewshire.
It means the effective closure of the business, which has a history back to the First World War.
The social firm is making losses of £10,000 per week, which the charity says it can no longer sustain.
The last day of production is likely to be September 28.
Erskine says its decision comes after consultation with trade union partners.
The Evening Times understands five former servicemen, including one who is classed as a supported worker, are to lose their jobs, as well as a further seven supported workers.
The furniture business has struggled in the recession and has been unable to cope with competition from large brand furniture retailers, such as Ikea at nearby Braehead.
The charity's garden centre business and its care provision division are not affected by the crisis at the furniture factory because they are set up as separate concerns.
Erskine's chief executive Steve Conway said: "It is regrettable we are making these redundancies. We will redouble our efforts on supporting the people in Erskine Furniture through this process and also assisting them through external organisations to find alternative employment."
Paisley and Renfrewshire North MP Jim Sheridan said he was very disappointed no resolution had been found to save the jobs.
He said: "I was hoping somebody could come in and take the business on, or find some work for the workers, but it has not happened.
"We have been lobbying hard with the Scottish Government and the local council to get contracts for work.
"But, in the end, Erskine just could not compete with the private sector, it is very sad."
Founded in 1916, Erskine has provided nursing and medical care to former members of the Armed Forces through two world wars and more recent conflicts and peacekeeping initiatives.
In the past year the charity has cared for more than 1300 veterans.