Founder guide · Funding

Grant, loan or equity: which money fits your startup?

Updated 30 October 2026By Saksham Agarwal4 min read

Short answer

Match the money to what you need it to do. A grant fits when you need to prove something and your startup meets a scheme’s published criteria. A loan fits when the business already brings in cash it can repay from, even with a government guarantee behind it. Equity fits when the business must grow faster than its own cash allows and you are ready to give up a share of it for good. Most early startups use them in that order.

Three questions that decide it

Can you repay? If not from today’s cash flow, a loan is the wrong money, guarantee or no guarantee.
Will you give up ownership? Equity costs nothing each month, and a share of everything for ever.
Do you fit a scheme’s criteria today? Grants are competitive and rule-bound. Eligibility means you may apply, not that you will get it.

	Grant	Loan	Equity
Repay?	No	Yes, with interest	No
Give up ownership?	No	No	Yes, permanently
Who decides	A committee, against published criteria, in competition	A lender, on your ability to repay	An investor, on conviction
Best for	Proof of concept, prototypes, trials, specific costs a policy covers	Working capital, equipment, growth with revenue behind it	Fast growth that cash flow can’t fund
Common myth	“Eligible means entitled.”	“A government-backed loan is government money.”	“Valuation is what I say it is.”

Grants: where they come from in 2026

Most grants for early startups now come from state policies and from incubators. The central Startup India Seed Fund Scheme stopped taking new applications on 31 May 2026 (what that means). In the Tricity, Haryana offers a seed grant of up to ₹10 lakh (Haryana scheme) and Chandigarh grants of up to ₹7 lakh at the seed stage and ₹12 lakh at early growth (Chandigarh policy). Each has its own registration rules (details).

Grants are released in tranches against milestones. Plan your costs so the work doesn’t stop while you wait for the next one.

Loans: what the government guarantee does

Under the Credit Guarantee Scheme for Startups, run through the National Credit Guarantee Trustee Company (NCGTC), a lender can get a government guarantee on a loan to a DPIIT-recognised startup. The guarantee covers up to ₹20 crore per borrower, raised from ₹10 crore (PIB, 17 April 2026).

Who can lend under it: scheduled commercial banks and financial institutions, RBI-registered NBFCs rated BBB or above with a net worth of at least ₹100 crore, and SEBI-registered alternative investment funds.
How much is covered: on a loan-by-loan basis, 85% of the amount in default for loans up to ₹10 crore, and 75% above that.
What it costs: a guarantee fee, usually 2% a year of the amount outstanding, lower for women entrepreneurs, units in the North-East and some priority sectors.
Who qualifies: a DPIIT-recognised startup that is not in default to any lender and not classed as a non-performing asset, certified as eligible by the lender.

Source: NCGTC, FAQs on the Credit Guarantee Scheme for Startups, 2025-26.

By the end of 2025-26, more than 410 loans worth over ₹1,250 crore had been guaranteed under the scheme (PIB, 17 April 2026).

The guarantee protects the lender, not you. It makes a loan possible without collateral. You still repay every rupee, with interest, and the lender still decides whether you can.

Equity: where government money fits

The government also puts money into startups through the Fund of Funds for Startups, a ₹10,000 crore corpus run by SIDBI. It does not invest in startups directly. It invests in SEBI-registered alternative investment funds, which must put at least twice that contribution into startups (Startup India, June 2026). By April 2026 it had disbursed more than ₹7,000 crore to over 135 such funds, which had invested more than ₹26,900 crore in over 1,420 startups (PIB, 17 April 2026). The government has since notified Startup India Fund of Funds 2.0, with another ₹10,000 crore, also implemented through SIDBI (Startup India, June 2026). To reach this money, you approach the funds it backs, not the government.

Take equity when the business has to grow faster than its own cash allows, and not before. Each round dilutes you permanently and gives a new party rights over your decisions.

Two more that founders confuse with money

Incubation gives you space, mentors and credibility, and many schemes route their money through incubators. It is a selection, not funding in itself. The startup tax holiday deducts profits you have actually made, needs its own approval beyond DPIIT recognition, and matters later than most founders think (how it works).

Where LABH fits

We map central schemes, your state’s schemes, incubators, angels and debt in your Funding Opportunity Map. Each is checked against its official source in the week we write it and sorted into apply now, prepare for, or don’t apply, with the reason. We take no percentage of anything you raise.

Questions founders ask

Is a government-guaranteed startup loan free money?

No. Under the Credit Guarantee Scheme for Startups the guarantee protects the lender if you default, which can make a loan possible without collateral. You repay the loan in full, with interest, plus a guarantee fee that is usually 2% a year.

How much can the startup credit guarantee cover?

Up to ₹20 crore per borrower. On a loan-by-loan basis it covers 85% of the amount in default for loans up to ₹10 crore, and 75% above that.

Does the government invest directly in startups?

Not through the Fund of Funds for Startups. That ₹10,000 crore corpus, run by SIDBI, invests in SEBI-registered alternative investment funds, which then invest in startups. Fund of Funds 2.0, with another ₹10,000 crore, works through SIDBI too. Founders approach those funds.

Should an early-stage startup take a loan or a grant first?

If the business has no revenue to repay from, a grant or incubator programme usually fits first. A loan fits once there is cash flow to service it. Equity fits when growth has to outpace that cash flow.

Not sure where your startup stands?

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Saksham Agarwal is the founder of LABH Advisory in Mohali, a Registered Mentor on BHASKAR (Startup India’s national registry, run by DPIIT) and a member of TiE Chandigarh. LinkedIn

Sources

Checked against these official sources on 30 October 2026. Schemes change, so check the source before you apply.