The unexpected emergence of COVID-19 has placed businesses throughout the globe under considerable financial hardship, and financial constraints are a significant barrier to business expansion, particularly in developing countries with insufficient credit markets. Using yearly data for Chinese listed businesses from 367 cities, we examine the impact of COVID-19 on financial restrictions and the corresponding mechanisms of action by using a difference-in-differences (DID) methodology. We discover that COVID-19 leads to a significant increase of 0.117 in the KZ index of listed firms, i.e., an increase in financing constraints, and this result is consistent with various robustness tests. We also show that COVID-19 considerably lowers a company’s capacity to obtain external financing by increasing debt costs and deterring commercial credit. The pandemic significantly reduced the company’s commercial credit by 0.008 and increased debt costs by 0.2%. Moreover, the data demonstrate variation across industries, business ownership, and firm scale. Our findings indicate that decreasing information asymmetries facilitate successful adaptation to and recovery from external shocks. Our analysis suggests that governments should promulgate policies that are conducive to corporate financing to help companies maintain development during the outbreak of the epidemic and ensure economic sustainability.