The SME sector is of great importance for the economy and economic stability of every country. It is characterized by rapid change, willingness to innovate, and a specific way of financing that has its advantages and disadvantages. Since this sector's sources of financing are often insufficient for growth and development, companies are looking for a suitable external source of financing. Financing choice is a key factor in the company development and creation of competitiveness in the market, and it is precisely the external finance source that a large part of this paper is devoted to. Theoretical and practical knowledge determines the role and importance of the SME sector in the European Union and the Republic of Croatia, the possibilities and importance of sources of financing in business performance, and the limitations of financing the SME sector in Croatia. Guidelines are also proposed to encourage the SME sector in the form of further systematic external financing. Empirical research conducted for this paper includes research in micro, small, and medium enterprises operating in the Zadar County. The research was conducted through a semi-structured interview with the management of the company, to collect all relevant data related to the possibilities and limitations of financing the SME sector, with an emphasis on external financing. Although respondents were most critical of access to external sources of finance, in the form of high- interest rates, collateral, additional costs, administration, etc., they agreed that without their use there would be no significant progress in the business. The reason for this is the unfavorable legislative environment that sometimes limits the growth of the SME sector, instead of encouraging it, so entrepreneurs are generally unable to finance their investments from their sources. To ensure a more favorable entrepreneurial environment in the future, financial institutions need to create a better approach to SME sector entities, neutralize the differences between SMEs and large companies and implement several other regulations that require the opinion of entrepreneurs themselves.