Small and Medium Enterprises (SMEs) have been recognized as an important strategic sector especially among the developing countries. This paper intends to study the development of SMEs in Sri Lanka compared with developed Asian country of Singapore. The paper further reviews the empirical studies in order to identify the major contributions and challenges faced by the country. The key message from the study is that Sri Lanka faces several challenges include the absence of adequate and timely finance, limited capital and knowledge, non-availability of suitable technology, low production capacity, constraints on modernization and expansions, non availability of highly skilled labour at affordable cost, follow-up with various government agencies to resolve problems etc. However, Singapore have technical trade barriers, high operating and labour cost, and intense competition, the SMEs of the country sharpened by ongoing government support, a robust infrastructure, a strong financial sector and myriad schemes aimed at developing a pro-enterprise environment. The government of Singapore is seized of the issues and earnestly trying to encourage effective and creative business development. This paper attempts to identify the challenges and offer a few suggestions towards formulating a workable framework for the SMEs in Sri Lanka.