High Risk NAICS Codes

Janet Gershen-Siegel
April 1, 2021
High Risk NAICS Codes Credit Suite

What are High Risk NAICS Codes?

High risk NAICS codes can be the difference between getting business funding … or not. But what are they?

What Do High Risk NAICS Codes and Names Have to Do with Funding Denials?

High Risk NAICS Codes Credit SuiteThere are certain industries that lenders feel are extra risky. If your business seems to be in one of these industries, you could be looking at automatic denial. At the least, you may be subject to stricter underwriting. Plus you can end up with higher rates and less favorable terms.

Lenders judge which industry your business is in based on a couple of things. First, they look at your business name. Then, they look at your business code. This could be either SIC or NAICS codes

So, your job becomes finding a way to keep from getting a denial automatically, based on your industry code or business name. Yet, you still have to be honest. Integrity is of the utmost importance and lack of it could cause future denials and even criminal charges.

What are High Risk NAICS Codes?

The North American Industry Classification System (NAICS) is a somewhat recently instituted business classification system. Its purpose is to classify business establishments, and collect, analyze, and publish statistical information on the economy of the United States.

High Risk SIC Codes vs High Risk NAICS Codes

For each NAICS Code there may be multiple SIC codes. This is because SIC codes break down more specifically.

For example, there are over 30 SIC codes under the Engineering Services code of 8711. But the NAICS code for Engineering Services is 541330. While the plan is to fully switch to the NAICS system, many industries still have the old SIC system deeply ingrained. For this reason, the switch hasn’t happened exactly as planned, and currently both systems are in place.

What are SIC Codes?

An SIC (Standard Industrial Classification) code is a four digit number that the US government assigns to businesses. It makes it easier to identify a company’s primary activity. Lenders and others use it as an indicator of the kind of business a company is in.

The Securities and Exchange Commission (SEC) developed the SIC Code system. The first four digits signify the general industry of a business. For example, 8711 refers to Engineering Services. Then, numbers add to the end of this 4 digit chain to add specificity.

For example, 817701 is Naval Architects, while 871103 is Engineers-Agriculture. And 871105 is Contractors- Engineering General. There are over 30 individual codes under the 8711 Engineering services code alone.

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Key Differences Between SIC and NAICS Codes

Check out these salient differences in the two types of codes.

SIC Codes NAICS Codes
Developed solely by the U.S. government Developed in conjunction with the U.S., Canadian, and Mexican governments
Groups together establishments in terms of either demand or production Groups together establishments that use the same or similar processes to produce goods or services
Active use for business targeting in the private sector Active use for government statistical purposes

High Risk NAICS Codes and the IRS

You choose a SIC code to report to the IRS. They will use it to determine if your business tax returns are comparable to other businesses in your industry. If your deductions aren’t reasonable when compared to other businesses in your industry, as determined by SIC code, you could be audited. Therefore, choosing the right SIC code with the IRS is essential. NAICS codes are going to replace this system soon.

High Risk NAICS Codes and Your Business

Certain codes associate with industries posing more risk than others. If you happen to choose one of these high risk codes unnecessarily. You may get a funding denial. If you understand how the system works, you can choose the best code the first time.

Some examples of high risk industries include:

  • casinos
  • pawn shops
  • liquor stores
  • automotive dealers
  • even restaurants

As with any business aspect, risk must be taken into consideration. Each industry code has its own inherent issues. Still, some industries are thought to be riskier than others by their very nature.

An industry may be seen as risky if there is a high chance of injury, either to workers or to customers. Or it may be considered risky if there is a high chance of theft. This is true despite how the business is doing, and despite its safety record or the accuracy and dependability of its security system. Even if a business is doing great, it could be seen as risky simply due to the nature of the industry.

High Risk NAICS Codes and Funding

So, if your SIC code or NAICS code indicates your business is part of a risky industry, what does that mean? The main issue is it could make it hard to get funding for your business. There are several industries that lenders are hesitant to lend to. Some of these industries are subject to stricter underwriting guidelines. And some cannot get funding at all.

In these cases, the business must seek out other funding options. These options could include:

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What’s the Solution for Getting Funding with a Risky NAICS Codes?

It’s key to remember, you get to choose your SIC code. While you want to be honest, you can still be general. You do not have to be more specific than necessary. For example, restaurants are risky, but if you also sell boutique items, you can use a SIC code for that. If more than one SIC code can apply, choose the one that is the least risky in the eyes of lenders. There is nothing underhanded or unethical about doing so.

Bonus: Business Names and Risk

As already mentioned, your business name can indicate risk. That is, if it indicates you are part of a high risk industry. For example, auto sales is considered a risky industry. You do not have to name your business “Joe’s Used Auto Sales”. You can just name it “Joe’s” and be done. There is nothing unethical or sneaky in doing this, either.

Codes and Names Are Not the End Game

Of course, choosing a SIC code and name that does not indicate risk isn’t a guarantee of funding. There are many other factors that go into a lender’s funding decision including fundability. However, if you choose the wrong code or business name, the lender may never see how fundable your business really is.

What are Some High Risk Industries?

    • Auto, RV or boat sales
    • Computer and software related services including programming
    • Dry cleaners
    • Gas stations or convenience stores
    • Long distance or “over-the-road” trucking
    • Mobile or manufactured home sales
    • Phone sales and direct selling establishments
    • Real estate agents/brokers
    • Real estate developers or land subdividers
    • Restaurants or drinking establishments
    • Taxi cabs (This includes the purchase of cab medallions)
    • Travel agencies
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How Else are SIC and High Risk NAICS Codes Used?

Currently, both codes are in use. Not by banks just to determine whether or not to lend. Other ways agencies use these codes include:

  • The Department of Revenue may use them for legislative purposes
  • They can be used to extend government offered incentives
  • To keep taxpayers within a specific industry aware of changes to laws.
  • These codes are used by the IRS for multiple purposes:
  • To determine product classes in retention to exchanges of property or depreciation
  • For comparative purposes, for example, if your information doesn’t track with others under your code, it could flag you for an audit

These are just examples, there are too many to list.

And they can be used by the SBA categorize your business. This is especially true when it comes to applying for government contracts. You must meet size standards for contracts, and the SBA assigns a specific size standard to each NAICS code. The SBA also uses NAICS codes to determine eligibility for the Women-Owned Small Business Federal Contracting program. They keep a list of qualifying codes.

High Risk NAICS Codes: Takeaways

Businesses need funding, but if your business is perceived to be a part of a risky industry, you may get a denial. SIC Codes, NAICS Codes, and Business Name all contribute to the risk perception of lenders. Choosing the wrong code or name for your business could get you an unnecessary automatic denial for funding.

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  1. I named my company ‘Monarch Blue Ventures LLC’ with the purpose of engaging in real estate activities such as wholesaling, flipping, and other related activities. What low-risk keyword should I use to describe my company?

    1. Hi,

      Are you asking about which NAICS code would be best? Because you’re not going to be able to get around a code that has something or other to do with real estate. Flipping, real estate investing, speculation, wholesaling, and even real estate agents are all in the high risk bucket because of either a high risk of personal injury and/or some of these (not investing) having a low bar to entry. If traditional lenders feel that an industry doesn’t have strict training requirements for entry, then they’re going to see the likelihood of failure as being high. And they won’t stop to look at your experience in the industry.

      Your best bet is to look beyond traditional lending and consider alternatives like business credit, see: https://www.creditsuite.com/blog/using-business-credit-to-buy-real-estate/

      Equity crowdfunding can be an option for investing, see: https://www.creditsuite.com/blog/equity-crowdfunding-for-real-estate-investors/

      Happy flipping! 🙂

  2. Hi. I received my EIN under Angela’s Jewelry first and AO Productions for my business. Should I keep the names as is or switch them around. Which codes should I use to be less risky? My jewelry business will be online mostly, AO Productions is for the resale and wholesaling general merchandise online only to start. How can I code these two entities. I searched the Sic site and NAICS too and it was confusing and frustrating. Thank you

    1. Hi and I hear ya on the NAICS codes and site. It could certainly be better organized.

      Jewelry stores, wholesaling, retailing, repairs, designing, etc. are virtually always going to be high risk. And that makes sense. You’re dealing with a high-priced but also easy to carry commodity. It’s easy to steal and then fence unless it’s truly unique and/or personalized.

      Jewelry NAICS codes tend to be:

      423940 Jewelry, Watch, Precious Stone, and Precious Metal Merchant Wholesalers (Jewelers’ findings merchant wholesalers) (this is on the NAICS list of high risk codes)
      339910 Jewelry and Silverware Manufacturing (Engraving and/or etching costume jewelry)
      448310 Jewelry Stores (Jewelry stores, precious) (on the high risk codes list)
      448150 Clothing Accessories Stores (Costume jewelry stores) (on the high risk codes list)
      541490 Other Specialized Design Services (Jewelry design services)

      But just because a code/industry isn’t on that list, that doesn’t mean it’s not high risk. The list is incomplete and not well put together—and the fine folks there say there are no plans to update it at this time.

      So we’re left to try to extrapolate. But like I said, it’s hard to see any kind of jewelry handling or sales as being anything but high risk. I suspect that Angela’s Jewelry will be seen as high risk regardless of the code or name you use.

      Now let’s look at wholesaling general merch.

      Possible NAICS codes (because I’m not sure of the type of general merchandise you’re wholesaling) are:
      452319 All Other General Merchandise Stores (Trading posts, general merchandise)
      423990 Other Miscellaneous Durable Goods Merchant Wholesalers (General merchandise, durable goods, merchant wholesalers)
      493190 Other Warehousing and Storage (Public warehousing and storage (except farm products, general merchandise, refrigerated, self-storage))
      424990 Other Miscellaneous Nondurable Goods Merchant Wholesalers (General merchandise, nondurable goods, merchant wholesalers)
      452311 Warehouse Clubs and Supercenters (Warehouse clubs (i.e., food and general merchandise)) (I get the feeling this is for places like Walmart)
      453998 All Other Miscellaneous Store Retailers (except Tobacco Stores) (Auction houses (general merchandise)) (on the high risk codes list)
      424210 Drugs and Druggists’ Sundries Merchant Wholesalers (General-line drugs merchant wholesalers)

      So it seems that AO Productions has a better chance of not being immediately labeled high risk although that depends on what you sell.

      There are really 3 ways that the NAICS and Experian and banks and everyone else who uses the codes looks at high risk:
      1) Tempting target for thieves/cash-intensive businesses (jewelry stores are a prime example of this, as are gas stations)
      2) Higher than average chance of personal injury to either employees or customers (such as auto repair) and
      3) Low barrier to entry to the industry, so there are people who get into these businesses who are more likely to lose their way and go bust. A good example of this is life coaching, which has no standards, no educational requirements, no tests, and, in most places, no regulation.

      #3 is also why there are often purely online industries which are tagged as high risk. They pass #1 and #2 with ease, but it’s #3 that trips them up. So that may (not necessarily) happen with AO Industries.

      But all is not lost!!

      High risk NAICS codes matter to the business CRAs, and they matter to traditional lenders. But they often don’t matter too much to nontraditional lenders. I Googled jewelry store business loans and found a bunch of hits. Definitely make sure you put the word business into your search; otherwise you’ll end up with sites offering to finance the purchase of engagement rings.

      I didn’t recognize most of the places on page 1 of the results, but I found OnDeck on page 2, and we’ve reviewed them. For other lenders, check them on the Better Business Bureau site and even places like Yelp and Google reviews. Ask other friends in the business, too. The last thing I want is for you to be ripped off!

      Another option, if you’ve got good personal credit or can partner with someone who does, is our Credit Line Hybrid. Approvals for the CLH have nothing to do with NAICS code so yours wouldn’t matter in that case.

      Best of luck with your businesses!

  3. I wanted to know what the best code to use for an Airbnb business and then a car rental business. Right now I am listed under real estate but I’m curious to know if there is a less risky category I can use.

    1. Hi – I suspect the most relevant code for an Airbnb business would be 721191 Bed-and-Breakfast Inns (Inns, bed and breakfast). For a car rental business, it’s likely to be 532111 Passenger Car Rental (Automobile rental). Neither of these are on the NAICS list of high risk businesses, but please keep in mind that this list is from 2014 and hasn’t been updated since then.

      The thing is, I suspect real estate and car rentals, despite not being on the list, are probably always going to be seen as high risk. After all, there are slip and fall issues with any bit of real estate, and accident issues with any type of vehicle, no matter how well a company is insured.

      Hence the bad news is that it might not be possible to get around the issue of high risk. High risk is an issue for banks in particular.

      But the good news is, you aren’t limited to just banks when you’re looking for business financing. Our Credit Line Hybrid, for example, is really just based on your personal credit. If you (or a credit partner or guarantor) have a good FICO score, then your NAICS will be immaterial, no matter what it is.

      Best of luck with your business. 🙂

    1. Tanja- Here is how to check the NAICS codes to make sure your business isn’t being categorized as High Risk or Restricted.
      1) Search for your business type at https://www.naics.com/search/
      2) In a separate tab cross reference the NAICS code with their list of High Risk and Restricted codes at https://r7j8i9x2.rocketcdn.me/wp-content/uploads/2014/10/NAICS-ASSOCIATION-High-Risk-and-Cash-Intensive-NAICS-Codes-List.pdf
      This is the easiest way to make sure you are properly classifying your business.

      If you have more questions feel free to call us at 877-600-2487.

  4. If one is investing in mortgage notes as a investor for their own portfolio, what Naic code makes sense and will the word “investments” just bring undue problems later on?

    1. Hi Chris- Here is how to check the NAICS codes to make sure your business isn’t being categorized as High Risk or Restricted.
      1) Search for your business type at https://www.naics.com/search/
      2) In a separate tab cross reference the NAICS code with their list of High Risk and Restricted codes at https://r7j8i9x2.rocketcdn.me/wp-content/uploads/2014/10/NAICS-ASSOCIATION-High-Risk-and-Cash-Intensive-NAICS-Codes-List.pdf
      This is the easiest way to make sure you are properly classifying your business. If you have more questions feel free to call us at 877-600-2487 or schedule a free consult at https://crdt.st/udZra

    1. You have to make sure that you are properly categorizing your business so here is how to check the NAICS codes to make sure your business isn’t being categorized as High Risk or Restricted.
      1) Search for your business type at https://www.naics.com/search/
      2) In a separate tab cross reference the NAICS code with their list of High Risk and Restricted codes at https://r7j8i9x2.rocketcdn.me/wp-content/uploads/2014/10/NAICS-ASSOCIATION-High-Risk-and-Cash-Intensive-NAICS-Codes-List.pdf
      This is the easiest way to make sure you are properly classifying your business. Choosing your NAICS code is just one of the factors that affects your fundability so make sure that all foundations of your fundability is set up correctly as well. We. have training videos about this on our YT channel, feel free to visit youtube.com/creditsuite. Hope this helps.

  5. My business name is Everett and Associates, LLC. I’m providing funding solutions to new and existing businesses. Do you think my business name is ok? Also do you think my strategy will enable lower risk funding?

    1. Hey Ken, here is how to check the NAICS codes to make sure your business isn’t being categorized as High Risk or Restricted.
      1) Search for your business type at https://www.naics.com/search/
      2) In a separate tab cross reference the NAICS code with their list of High Risk and Restricted codes at https://r7j8i9x2.rocketcdn.me/wp-content/uploads/2014/10/NAICS-ASSOCIATION-High-Risk-and-Cash-Intensive-NAICS-Codes-List.pdf
      This is the easiest way to make sure you are properly classifying your business.

  6. Would my NAICS CODE be considered risky: **531110 – Building, residential, rental or leasing (NAICS CODE:53 – Real estate and rental and leasing; NAICS SUBCODE 531110 – Lessors of residential buildings and dwellings)?

    I only got a $2000 credit card for my LLC, Enjoy Living Properties and not sure if the word “Properties” is considered risky too?

    I will be renting properties and subletting them on platforms such as Air BNB.

    I am still working on the website which will be: EnjoyLivingProperties.com

    1. Thank you for your comment Yolanda. Here is how to check the NAICS codes to make sure your business isn’t being categorized as High Risk or Restricted.
      1) Search for your business type at https://www.naics.com/search/
      2) In a separate tab cross reference the NAICS code with their list of High Risk and Restricted codes at https://r7j8i9x2.rocketcdn.me/wp-content/uploads/2014/10/NAICS-ASSOCIATION-High-Risk-and-Cash-Intensive-NAICS-Codes-List.pdf
      This is the easiest way to make sure you are properly classifying your business.

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