In 2026, Digital Transformation (DT) has shifted from just a technology upgrade to an essential survival plan for Small and Medium Enterprises (SMEs). This paper looks at the two-sided role of Artificial Intelligence (AI) as both a booster of business success and a big challenge to data privacy. While AI tools—like predictive analytics and automated customer service—make operations smoother and increase return on investment (ROI), they also widen the “privacy attack surface,” making SMEs at risk of data breaches and biased algorithms.  Through a mixed-methods study, this research examines the conflict between quick AI adoption and the weak cybersecurity setup in smaller companies. Results show that while AI improves market competition, many SMEs have difficulties with “black-box” transparency and the ethical over-collection of consumer information. The study suggests a “Privacy-First AI” model, promoting data minimization and decentralized processing to reduce risks. In the end, the paper finds that for SMEs, successful digital transformation relies on balancing technological advancement with a commitment to responsible AI management. Building this trust is not just about following rules but is also a key strategy for long-term success in a digital-focused economy.