We examine the firm-level and country-level determinants of the currency denomination of small business loans. We introduce an information asymmetry between banks and firms in a model that also features the trade-off between the cost of debt and firm-level distress costs. Banks in our model don’t know the currency in which firms have contracted their sales. When foreign currency funds come at a lower interest rate, all foreign currency earners and those local currency earners with low distress costs choose foreign currency loans. With imperfect information in the model concerning the currency in which the firms receive their earnings, even more local earners switch to foreign currency loans as they do not bear the full cost of the corresponding credit risk. We test these implications of our model by using a 2005 survey with responses from 9,655 firms in 26 transition countries that contains reports on 3,105 recent bank loans. We find that firms with foreign currency income and assets are more likely to borrow in foreign currency. In contrast we find only weak evidence that firm-level distress costs and financial opaqueness affect currency denomination. Interest rate advantages on foreign currency funds and exchange rate volatility partly explain differences in loan dollarization across countries, but not within countries over time. We find that country-level measures of information asymmetries (weak corporate governance and strong foreign bank presence) do encourage foreign currency borrowing, but only by foreign currency earning firms. All in all, we cannot confirm that information asymmetries and currency speculation are a key driving force of the recently observed increase in the dollarization of small business loans in Eastern European transition countries.