A number of studies have advanced the argument that small and medium enterprises are considered to be a hub for economic growth because they create jobs and are at the core of entrepreneurship. However, despite their significant contribution to socio-economic development, the phenomenon of non-performing loans and the default rate of SMEs are high particularly in Ghana. This study, therefore, explores the characteristics of SME borrowers and the macroeconomic variables that contribute to credit risk. Using a cross-section design, the study used a multi-level sampling technique to interview SME operators and managers, and loan officers from formal and informal financial institutions. This study used descriptive statistics, a chi-square test, Pearson`s moment correlation coefficient, and logistic regression to analyse the relationship between SME borrower characteristics, macroeconomic variables, and credit risk. The findings suggest that corporate characteristics such as age, size, level of education of owners, and value of collateral influence credit risk. Also, majority of the loans were inadvertently diverted due to agency issues. The study, therefore, recommends that SMEs take steps to clarify the conditions that come with loans to reduce the number of unsuccessful applications. In addition, Financial service providers should provide financial literacy to SMEs through training courses and seminars on how to invest the entire loan amount in the intended business venture.