The paper analyses the practice and basic features of local government unit borrowing in Croatia from 1997 to 2003. Local government units still rely on classical forms of loans as a form of security for resources for financing capital projects and there is little incentive for the issue of local government bonds. The borrowing conditions laid down are not a good basis on which to develop a local debt market or for facilitating local government borrowing. One of the reasons is also the dominant role of the city of Zagreb, which should be excluded from the establishment of budgetary restrictions on the borrowing of the other local government units in Croatia. Subsidised loans to local government units via the government financial institutions have been in some periods more expensive than via the commercial banks, and it is necessary to carry out a review of their role in the financing of local government unit capital projects. In any analysis of the borrowing and the size of the debt of local government units it is necessary to include the categories of financial assets as a better indicator of solvency and ability to repay debt. The article draws attention to a potential hold-up in the implementation of fiscal decentralisation, because local government units are investing some of their funds in the financial assets (shares and equity) of local utility firms.