Globally, small businesses is important in the global economy especially in Nigeria whereby it provide employment opportunities and contribute to the countries’ GDP. But the pandemic revealed a number of weaknesses and limitations that have been previously unnoticed: the inadequacy of financial provisions, restricted credit line, supply chain vulnerabilities, and the failure to upgrade to information technology. The study considered the economic and environmental challenges, as well as policy changes in SMEs due to COVID-19 pandemic. Systems theory was engaged in explaining small and medium enterprises and the challenges that distorts the overall performance of SMEs. The study adopted descriptive research design, which includes the systematic review of engaged secondary data from the relevant literature, reports and journal articles on small and medium enterprises, and matters on challenges posed by COVID-19. The data were analyzed and discussed thematically under economic impact and policy change. Key findings highlight that economically, the pandemic led to shortage of demands, distortion of supply and logistics, reduced productivity due to retrenchment and death of workers amongst others. On the environment, experiences of lockdown, interstate travel bans, quarantine, self-isolation also stalled movement of people, goods and delivery of services, and is underlaid with economic drawback. Finally, there were a number of policy changes such as - digitalization, remote hours, flexible working, deferred tax payments. However, there was not much evidence gathered on the support of government to SMEs in Nigeria while SMEs themselves were not so prepared for the pandemic. The study concludes with policy recommendations aimed at improving the resilience of small businesses in Nigeria, emphasizing the need for enhanced financial inclusion, infrastructure development, and digital literacy to mitigate future crises.