This paper is a critical review of the extant literature that examined the challenges and future prospects of Small and Medium-scale Enterprises (SMEs) within the context of the Nigerian economy. SMEs form a critical part of Nigeria’s economy, even as they are involved in every facet of the economy, contributing nearly 50% of Nigeria’s Gross Domestic Product (GDP) and over 80% of the national workforce. The performance of SMEs therefore directly impacts the overall performance of the Nigerian economy. Vibrant SMEs should give rise to vibrant economies; hence the success or failures of SMEs are of national interest and worthy of study. This paper discusses the roles of SMEs in Nigeria’s economic growth and development with a focus on their challenges and prospects. As with other developing countries, the paper identified numerous challenges such as inadequate technology, and unconducive business environment, inadequate infrastructure, and bad economic policies in Nigeria which have led to high failure rates of SMEs. But with government support and other private sector initiatives, their current and future prospects, however, look bright. The paper concluded that robust SMEs are necessary for economic growth and sustainable development in Nigeria. Thus, the government should provide access to affordable finances and address infrastructural deficits in order to tackle the challenges and improve the future prospects of SMEs in Nigeria.