As the division of labor for each link in the enterprise operation process becomes more and more detailed, the supply chain composed of large core enterprises and numerous upstream and downstream small and medium enterprises (SMES) becomes an important mode of production organization. Martin Christopher, a famous supply chain management expert, believes that there is only supply chain in the market but no enterprise. The real competition is not among enterprises, but among supply chains. SMES in the supply chain often face the situation of insufficient funds, which affects the stable operation of the supply chain. And the commodities traded and the good credit of core enterprises during the supply chain operation can help SMES to realize financing. Based on this, the concept of supply chain finance(SCF) emerged. Because SCF can effectively reduce the financing risk and cost of SMES, and help to solve the problem of financing constraints for SMES, it has received unanimous attention from financial institutions and enterprises. Compared with developed countries, China's financial market development is relatively backward, SMES' financing environment is even worse. China always look for ways to crack it. At the beginning of the 21st century, SCF has been introduced into China. Although it has made a certain contribution to solving the problem of financing for SMES, but its development is relatively slow, and the role has not been fully played. Therefore, it has great theoretical value and practical significance to study the internal mechanism of SCF supporting SMES financing, and to find the development direction of SCF in China. Through reading a lot of literature, this paper starts from the characteristics of SMEs and SCF, summarizes the relationship between SCF and SMEs financing, and summarizes the basic logic of using SCF to solve SMEs financing constraints. Then, a systematic analysis framework is constructed, and the internal mechanism of SCF solving the financing constraints of SMES is theoretically demonstrated. On the one hand, SCF effectively reduces the financing risks by improving the efficiency of information transmission, replacing individual SMES' credit with the overall credit of supply chain, and improving the stability of SMES' operations. On the other hand, SCF can significantly reduce the interest cost and transaction cost of SMES financing. After finding a logical junction between SCF and SMES financing, this paper summarizes the current situation of SCF supporting SMES financing in China. And point out the main obstacles of SCF in reducing SMES financing risk and cost are put for ward. Firstly, SCF's role is restricted by some legal systems. Secondly, the lack of risk control ability of SCF offsets its role in reducing SMEs financing risk to some extent. Thirdly, the poor quality of SCF products leads to the low financing cost of SMEs. In view of these problems, this paper proposes countermeasures to develop SCF to better support SMES financing. Firstly, establish a legal and institutional environment to support the development of SCF and SMEs financing from the aspects of guarantee, electronic contract and financing equity. Secondly, improve the risk management ability from the characteristics of SCF business. Thirdly, combine product innovation and technological innovation to further reduce the cost of SCF and improve the efficiency of SCF in promoting SMES financing. Based on the basic principles of economics and finance, this study mainly adopts literature research method and field investigation method to study the internal mechanism and Chinese practice of SCF supporting SMES financing. In comparison, other researches on SCF are mostly based on management theory and conducted from the perspective of supply chain management, but few from the perspective of economics. This study enriches this research perspective. The analytical framework of this study is innovative. It has some novelty in legal regulation of guarantee, financial risk control of supply chain and product innovation.