by business editor Trevor Sturgess

An extension to a controversial lending scheme that aims to help firms and house-buyers has been hailed as good news for small firms.

The government and Bank of England announced today that Funding for Lending is being extended by a year to January 2015.

Criticised for failing to live up to its promise of making it easier for firms to access cash for growth, it is now being skewed towards small and medium enterprises (SMEs). The more that banks lend to SMEs, the more they can borrow.

In another tweak, non-bank lenders such as asset-based and invoice finance houses can now access the scheme, encouraging them to take more risks when lending.

Roger House, Kent and Medway chairman of the Federation of Small Businesses, said: "Reviewing the Funding for Lending formula so more and cheaper loans are available to small businesses in Kent and Medway is good news as is the extension to the length of the scheme.

"The FSB has found that lending costs have slowly started to come down and more firms are finding loans at reduced costs, but there are still plenty of businesses who cannot access finance in the first place.

"We hope that the non-bank lenders that will be able to use this scheme and have different risk appetites might bring about a real increase in small business lending."

The CBI, the employers' organisation, said: "Funding for Lending is already making a difference in the housing market and there are signs that it is starting to lower the cost of finance for businesses. The additional incentives for banks should accelerate activity in the small business financing market."

Chancellor George Osborne said: "This is a big boost for the small and medium sized businesses that are at the heart of the British economy. The Funding for Lending Scheme has already reduced the costs of household mortgages and loans for businesses.

"This innovative extension will now do even more for small and medium sized businesses so that they can play their full part in creating new jobs."

But the scheme has been condemned by savers' organisations that claim the easy availability of cheap money by banks and other lenders has reduced the incentive to attract cash from investors, thereby depressing interest rates.