The transition towards a circular economy (CE) is part of the solution to reduce the global consumption of natural resources and increase resource efficiency in society. Product-Service Systems (PSS) is seen as one of the effective ways of moving towards a CE. PSS leads to an increase in product use by sharing or renting, and by extending material and product lifecycles through repair, remanufacturing, reuse and recycling. Therefore, designing PSSs have great potential to facilitate the CE transition. Many SMEs show an increased interest in a CE transition; however, they fall short in taking the right path towards designing PSS. Designing PSSs involve a rearrangement of resources, and SMEs usually do not possess the same resources as larger firms. Previous research clarifies that the transition from traditional product design to designing PSS is challenging for SMEs. This paper adds insights to the PSS literature and industrial practices through a single-case study by identifying and describing the challenges an SME may face when intending to design PSS. The data is based on interviews, workshops, and internal archive documents. The findings show that an SME faces both internal and external challenges. The internal challenges related to time constraints, the current business model, lack of financial resources, organisational structure and internal processes, dedicated employees for business and service development, and competence. The external challenges relate to SMEs position in the value chain, customer interests in PSS solutions, and handling of reversed logistics.