Business environment is perceived to influence various performance aspects of a business enterprise. This study employed empirical methodology via a survey design to investigate the effects of business environment on the productivity, innovation and growth of small and medium enterprises (SMEs) in Lagos State. The study considered 10 factors of the business environment and 3 indices of SMEs’ potentials. Definitional criteria the study adopted restricted the population to 456 SMEs. World Bank scientific model for sample size determination was used to select 228 SMEs through judgmental and convenience sampling techniques. Quantitative data were processed from respondents’ qualitative responses. The responses were elicited with a validated structured questionnaire. Analysis was anchored on generalised linear regression model (GLRM) that expressed causal relationship between business environment and potentials of SMEs in the State. The results showed that external finance and technology exerted significant effects on productivity, innovation and growth of the SMEs; infrastructure had significant effects on innovation and growth; competition and labour availability and costs significantly affected productivity, and social cultural factors significantly determined growth of the enterprises. The results also revealed that overall effect of the factors of the business environment was significant on the metrics of the SMEs’ potentials. The study recommended appropriate technology adoption by the SMEs and constantly upgrade of same; provision of adequate infrastructure and facilitating ease of access to external finance to the SMEs by relevant authorities.