The SMEs sector is very influential on economic growth in various countries, including Indonesia. During the Indonesian Covid-19 pandemic, SMEs were affected by social distancing policies, the implementation of community activity restrictions (PPKM) and other policies that disrupted SMEs operational activities. In order to overcome these problems, capabilities are needed that are able to help the performance of SMEs. There are four capabilities in this study, namely innovation capabilities, marketing capabilities, learning capabilities and managerial capabilities. This study examines the indirect relationship between the capability and performance of SMEs through competitive advantage as a mediating variable. Competitive advantage is considered capable of providing an important role in the relationship between the capability and performance of SMEs. Using a quantitative research approach, this study collected data with questionnaires to 107 SMEs actors in the city of Medan but only 101 were usable. This study proves that two of the four capabilities have a positive and significant effect on financial performance. This study also proves that the capabilities of the company must create a competitive advantage in order to be able to improve the performance of SMEs.