This theoretical study examines the impact of the 2016 demonetization initiative on Small and Medium Enterprises (SMEs) in India. The government's decision to invalidate the 500 and 1000 rupee notes aimed to combat black money, counterfeit currency, and corruption. However, it had immediate and long-term repercussions on SMEs, which are heavily reliant on cash transactions. This study analyzes the disruption in cash flow, decline in sales, and supply chain interruptions faced by SMEs in the short term, as well as the shift to digital payments, business formalization, and credit constraints experienced in the long term. The coping mechanisms adopted by SMEs, including diversification of payment methods and operational adjustments, are also explored. The findings highlight the need for enhanced access to credit, digital literacy programs, and a supportive regulatory framework to ensure the resilience and growth of SMEs in the face of economic reforms.