Businesses such as restaurants, bars and gyms were able to claim back costs of up to £2,500 for work such as the installation of carbon dioxide monitors or improving windows and vents.
The business ventilation fund opened for applications in November last year and closed in March.
But statistics show just £981,130 was paid out in that time, with only 577 out of 1,363 applications accepted (42 per cent).
A further 18 per cent were rejected and 39 per cent were closed or withdrawn.
Colin Borland, director of devolved nations at the Federation of Small Businesses, said the fund “was a good idea far from ideally executed”.
He said: "While we know that a small number of our members in Scotland benefited from the scheme, many of them complained of clunky admin systems and serious delays getting cash support to firms.
"While we were pleased to welcome the cash funding when it was first announced, these statistics underline that the initiative simply didn’t deliver as it should.
“We need ministers to look closely at what went wrong and learn the lessons, not least because they might look to deliver a similar programme again.
"While businesses are grateful for help to rise to the challenges posed by Covid, this money needs to reach local firms when it is needed, not end up stuck in a Government bank account.”
Scottish Conservative MSP Murdo Fraser said the figures would “astound and infuriate businesses who suffered enormous stress and financial hardship during the pandemic”.
He said: “It’s scandalous that they were denied lifeline funding due to the SNP Government’s bureaucratic obstacles – and the Federation of Small Businesses are right to express their dismay.
“The amount paid out is derisory and fewer than half of applications were successful, so the fund obviously wasn’t fit for purpose.
“The criteria for applications was clearly flawed, because it’s not as if there was a shortage of businesses needing assistance – countless small firms and sole traders were on their knees begging for assistance from the SNP Government to stay afloat.
“Instead of leaving them in the lurch, ministers should either have made it easier for businesses to apply for ventilation fund grants or transferred the money earmarked for it to another, more accessible, Covid support initiative.
“But throughout the pandemic, the SNP Government were quick to talk up the financial support they were offering – and incredibly slow to get money out of the door to businesses who desperately needed it.”
The largest proportion of funding went to businesses such as hairdressing, beauty services and massage therapies (20 per cent), followed by hospitality premises (20 per cent) and pharmacies (17 per cent).
Scottish Liberal Democrat MSP Willie Rennie accused the Government of only spending “a fraction of the total funding for businesses”.
A Scottish Government spokesperson said: “The Business Ventilation Fund provided funding to help small and medium-sized businesses improve their ventilation, and help reduce the spread of COVID-19.
“As the fund was demand-led, it was initially opened to businesses in high-risk sectors. Application numbers were monitored and to increase uptake we extended the eligibility criteria and provided significant flexibility to both local authorities and eligible businesses, including extending the date for businesses to submit their claims for reimbursement.
“We are currently engaging with businesses to evaluate the fund which will help inform future decisions and recommendations.
“Every decision the Scottish Government has taken has centred around ensuring businesses got the support they needed when they needed it – resulting in over £4.7 billion being allocated to businesses across the country, including around £1.6 billion in rates relief.”