Using simple descriptive analysis of the data from the Ethiopian Urban Household Socio-economic Survey, the paper found out that micro and small enterprises are financed from own savings. However, these forms of savings have been found to finance businesses that require small amount of capital and mostly service-oriented activities. Investments in larger businesses call for external resources. But the only extra finance available to micro and small enterprises is borrowing from friends and relatives, which have again a number of drawbacks. Existence of asymmetric information and lack of bankable collateral might explain lack of access to formal credit to this sector. Given the significance of bank credit to the sector, the paper suggests two possibilities for micro and small enterprises’ access to formal credit, namely, group lending scheme through the provision of package program and effective risk sharing among creditors, borrowers, and the government