Many countries implemented large-scale programs to guarantee private credit in re-sponse to the outbreak of COVID-19. Yet the role of banks in allocating guarantees – andthus in shaping their effects – is not well understood. We study this role in an economywhere entrepreneurial effort is crucial for efficiency but it is not contractible, giving riseto a debt overhang problem. In such an environment, credit guarantees increase efficiencyto the extent that they allow firms to reduce their repayment obligations. We show thatbanks follow a pecking order when allocating guarantees, prioritizing riskier, highly in-debted, firms, from whom they can extract more surplus. The competitive equilibrium isconstrained inefficient: all else equal, the planner would tilt the allocation of guaranteestowards more productive, safer firms, and would fully pass-through the benefits of guar-antees to firms in the form of lower repayments. We confirm the model’s main predictionson the universe of all credit guarantees granted in Spain following the outbreak of COVID.