Small and medium-sized enterprises (SMEs) are essential in fostering economic growth through their contributions to the rise in Gross Domestic Product, the generation of employment opportunities, the advancement of entrepreneurship, and the promotion of innovation. However, Batik SMEs encounter sustainability and organizational performance challenges. Previous research indicates that integrating circular economy (CE) principles is a viable strategy for improving the organizational performance of Batik SMEs. However, limited resources hinder direct implementation of this concept in their business processes. This research utilizes interpretive structural modeling as a decision-making tool to examine the prioritized factors for the implementation of CE practices in Batik SMEs. The research focuses on respondents with expertise in Batik SMEs in Banyuwangi. The findings reveal that decreased fees for waste treatment, cut expense of materials handling, and decreased frequency of environmental accidents are the most critical barriers requiring immediate attention. Stakeholders in the Batik Industry can utilize these insights to develop targeted strategies aimed at overcoming challenges and promoting sustainable practices. This approach holds the potential to enhance resource efficiency, reduce waste generation, and foster sustainability within the Batik sector, thereby aiding SMEs in achieving long-term viability and competitiveness.