Do you know how to avoid NAICS numbers that are high risk? And increase your Funding Warehouse? What does any of this have to do with how financial institutions perceive a company? But, before we go any further, what exactly is a NAICS number?
NAICS Codes
So the NAICS, or North American Industry Classification System, has its own six-digit classification system. This code categorizes business establishments for the purpose of collecting, analyzing, and reporting statistical data about the business economy in the United States. NAICS industry codes classify businesses based on the primary activities they perform.
For example, if your company manufactures tires and inner tubes, the NAICS code 441320 is for tire sellers.
But that’s not entirely correct, is it? You are a manufacturer rather than a dealer. So the NAICS code would begin with a series of numbers similar to 4420, which stands for rubber tire manufacture.
How the NAICS Works
The NAICS classifies firms in order to collect, analyze, and disseminate statistical data about the US commercial economy. As a result, the NAICS industry codes describe enterprises based on the activities in which they are primarily engaged. NAICS codes for businesses
In the case of tires, the NAICS or low risk business naics code contains numerous codes. They correspond to several pauses made by tires on their path from manufacture to end user. This contains various wholesalers, retailers, and the like.
Low-Risk NAICS Codes vs. High-Risk NAICS Codes
The NAICS has its own list of high-risk, high-reward industries. Casinos, pawn shops, and liquor stores are among the higher-risk industries on the high-risk business list, but so are automobile dealers and restaurants. Do you run a high-risk enterprise? The NAICS codes will then show this on your business credit report.
Certain high-risk businesses are required by OSHA to submit injury and illness reports.
Keep in mind that the list of high-risk and high-cash businesses is a few years old and maybe incomplete, with no intentions to update it.
The low risk naics code for real estate system, however, is not the sole classification system affecting corporate credit files. Here’s another popular expression. It’s something to keep in mind when it comes to establishing business credit.
Business SIC Codes
What exactly is a SIC number? Another business classification scheme includes the SIC Code (Standard Industrial Classification).
A Standard Industry Classification code, or SIC, is a four-digit numerical code provided to firms by the federal government to help identify the principal activity of the business.
This indicates the type of business a corporation is in. This system was created by the Securities and Exchange Commission. In the instance of tires, for example, your SIC code would be 3011. The numbers are somewhat clever in that there are industry categories that correspond to the first four digits, such as manufacturing, which corresponds to four-digit SIC codes that begin with either a 2 or a 3.
In small business SIC codes, the combination of the first and second digits indicate the principal industrial group. 30 denotes ‘Rubber and Miscellaneous Plastic Products’ in our example.
Digit Groupings
The SIC code’s digits are grouped to identify the industry and its group. The first two digits in the SIC code identify the major group, the third digit identifies the industry group and the fourth digit identifies the industry.
In fact, the Internal Revenue Service will use the SIC code that you select. This is in order to determine if your business tax returns are comparable to the other businesses in your industry. Therefore, if your tax deductions do not reasonably resemble the other businesses in your industry, your business could be audited.
This means the IRS is looking for where to find the NAICS code on your tax return – your tax return.
Low-Risk SIC Codes for Businesses vs. High-Risk SIC Codes
Furthermore, certain businesses may be deemed high-risk if they do not use the correct SIC codes to classify their operations. However, if you understand how the business classification system works, you will be able to select the correct code on the first attempt.
Which Coding System do the Banks and the Business Credit Reporting Agencies Use?
Both are used by business credit agencies and small company lending organizations. However, the SIC code system is being phased out, and NAICS numbers will take its place. However, for the time being, presume they are both in play because the changeover has not yet been completed. These coding schemes are related but not the same.
The two business classification systems are used by lenders, banks, insurance firms, and business credit reporting agencies to determine whether your company is in a high-risk industry classification.
This indicates that your business classification could result in a loan or business credit card denial. Some SIC codes can result in automatic turn-downs, increased premiums, and credit limit reductions for your company.
True Injury Risks According to the CDC
The Centers for Disease Control and Prevention issued an article on dangers in small enterprises in 1999. This page discusses SIC codes and provides information on injuries linked with the codes.
While this is not the genuine method used by lending institutions to assess risk, it is nonetheless of interest. It can also reveal what is driving part of the reasoning. This could be the solution to the question of what is NAICS code used for.
Occupational injuries, such as those mentioned in the CDC report, contribute to the risk calculus. However, vocations that are cash-intensive enterprises represent the other side of the risk coin.
After all, a pawn store may not pose a significant danger of injury. However, the high sums of money usually associated with one make it an appealing target for burglars.
Avoid High-Risk NAICS Codes and Choosing Better NAICS Codes
Returning to our tire example, let’s look at how to select the best NAICS code for your company. The primary industry group is identified by the first two digits of the SIC code. The third number of the business activity code NAICS will then identify the industry group. The fourth digit will then identify the industry. This is how various organizations categorize businesses.
You should now learn how to obtain a NAICS code.
Here’s how to get your company’s NAICS code:
- Automotive sales
- Money lending and collecting
- The travel industry
- Real estate investing (this is potentially where the NAICS code for real estate would be – the NAICS code for real estate is 531390 for Other Activities Related to Real Estate)
- Anything else with reference to investing of any type
- Adult entertainment
- Restaurants
- Dry Cleaning establishment
Avoid High Risk NAICS Codes: Back to Our Example for a Moment
But what exactly is the NAICS code? For automobile sales, for example, you would generally choose 441110, ‘Automobile dealers, new only or new and used’.
Most lenders, however, will automatically reject your business due to the high-risk aspect in the business categorization name. Naturally, you want to be truthful about your NAICS coding classification.
Don’t worry if more than one NAICS code may apply. Because there is nothing wrong with selecting company NAICS codes that will not result in lender rejection.
As a result, if you want to start a car sales company, you’ll need a business code with anything like automotive components written in it. That manner, you can continue to operate your legitimate “automotive sales” firm without being labeled dangerous.
Even if lenders search companies by NAICS code, you’ll be alright if you use an NAICS query by company name. A better NAICS code can mean the difference between getting company funding and not getting it at all.
Avoid High Risk NAICS Codes: Takeaways
When it comes to building and maintaining your company’s credit, we show you how to do so in the most efficient and effective methods possible.
When selecting NAICS numbers for your business, you must use caution. The NAICS code you choose will be used by the Internal Revenue Service. This is to see if your company’s tax returns are comparable to those of other companies in your industry.
As a result, if your tax deductions do not reasonably mirror those of other businesses in your field, your company may be audited.
Furthermore, some businesses are classified high-risk because they do not use the correct NAICS numbers to classify their operations. However, if you understand how the business classification system works, you will be able to select the correct code on the first try.
Go to naics.com
Use their search function and their business activity code lookup
Select the closest fit – if there is no good fit, search again for other NAICS business codes
You Can Avoid High-Risk NAICS Codes
If you choose specific high-risk NAICS codes for your business classification, you will be denied a loan. Look over the high-risk industries list of cash-heavy enterprises and more before deciding on your SIC code and NAICS code. Do so before you start creating your NAICS codes.
Here are a few high-risk industry codes to be aware of:
Choosing the incorrect NAICS number could cost your company money and classify you as high-risk. As a result, your insurance premiums, financing ability, and even credit limit suggestions may be affected.
This minor blunder of selecting the incorrect NAICS code could cost your company money in the long run.
As a result, do your homework before deciding on an NAICS code for your company.
Restricted industries (automatic decline) include:
- Weapons or Ammunition? Manufacturing, wholesale, and retail are all options.
- Bonds for Bail
- Check Cashing Services
- Energy, oil commerce, or the extraction or production of petroleum
- Finance: Federal Reserve Banks, foreign banks, banks, bank holding firms (the NAICS code for a holding company is likely to be found here), loan brokers, commodity brokers, security brokers, mortgage brokers, mortgage bankers, mortgage companies, bail bond companies, or mutual fund managers).
- Activities involving gaming or gambling
- Loans are made for the purpose of making speculative acquisitions of securities or items.
- Pawn stores
- Campaigns, candidates, and committees in politics
- Administration of government (e.g., these are city, county, state, and federal governmental agencies).
- X-rated merchandise or entertainment
High-Risk Industries (subject to stricter underwriting guidelines):
- Agribusiness or forest products
- Sales of automobiles, leisure vehicles, and boats.
- Courier services are available.
- Services relating to computers and software.
- Cleaning services
- Entertainment (adult entertainment is to be deemed restricted) (adult entertainment is to be considered restricted).
- Contractors in general (here is where you would likely find the general contractor NAICS code)
- Convenience stores or gas stations (also known as c-stores)
- Nursing homes assisted living facilities, and continuing care retirement communities are examples of healthcare institutions.
- Contractors that specialize in a certain trade
- Hotels versus motels
More High-Risk Industries
- Wholesale and retail of jewelry, precious stones, and metals (this could be where to find the NAICS code for retail sales).
- Limousine services are available.
- Long-distance trucking, sometimes known as “over-the-road” trucking.
- Sales of mobile or prefabricated homes.
- Phone sales and direct selling businesses
- Brokers and agents in real estate (this is potentially where the NAICS code for real estate holding company would be)
- Developers of real estate or land subdividers
- Restaurants and drinking places.
- Software or programming firms
- Taxi cabs (including cab medallion purchases).
- Travel companies
