The Business Secretary is asking regulators to examine so-called "pay to stay" demands of suppliers to major firms.
Vince Cable took to Twitter to denounce such practices as "wrong" in the wake of revelations the maker of Mr Kipling cakes and Bisto gravy, Premier Foods, had renewed a call for a payment from suppliers if they wanted to remain on its books.
The issue gained momentum after the BBC's Newsnight programme accused the company of raking in millions of pounds.
Premier Foods, which has struggled financially for several years, defended the payments as investments and insisted suppliers benefited from the arrangement.
But the issue is to be referred to the Competition and Markets Authority by Mr Cable and the company faced a furious reaction from the wider business community as 'pay to stay' - used by a variety of firms - came under scrutiny.
Simon Walker, director general of the Institute of Directors said the practice amounted to "holding small businesses and suppliers at gun-point."
He added: "The news that Premier Foods could be forcing its suppliers into controversial 'pay to stay' arrangements is deeply disturbing.
"At a time when public faith in business is painfully low, such unacceptable behaviour puts a bullet in the chamber for those who think the heavy-hand of regulation is the only way to change the culture of corporate Britain."
The Federation of Small Businesses (FSB) said the firm's bosses "should be ashamed of themselves" for "demanding a cash gift under the threat of de-listing".
It warned many smaller outfits would go bust unless 'pay and stay' arrangements were dealt with.
The FSB said one small business in the South West was asked to hand over £1,700 "to secure the chance for future business."
Premier Foods said: "We launched our 'invest for growth' programme in July last year as part of a broader initiative to reduce complexity in support of plans to help turnaround the business.
"This included a commitment to halve the number of our suppliers and develop more strategic partnerships focused on mutual growth.
"As part of the programme, our suppliers are asked to make an annual voluntary investment to help fund our growth plans.
"In return, our suppliers benefit from opportunities to secure a larger slice of our current business. They also stand to gain as our business grows in the future.
"In the current challenging environment, the support of all of our suppliers is crucial.
"We are delighted with the positive response we have had from many who are actively engaging in building a new partnership with us, including many small companies.
"Indeed, many of our suppliers have seen their business grow as a result."
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