How to Avoid High Risk NAICS Codes

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How to Avoid High Risk NAICS Codes

Published By Janet Gershen-Siegel at March 4, 2018

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Do you know how to Avoid High Risk NAICS Codes? And before we go any further, just what is an NAICS code, anyway?

NAICS Codes

The North American Industry Classification System, or NAICS, has its own six digit coding system. For example, if your company makes tires and inner tubes, the NAICS code might be 441320, which is for tire dealers. But that’s not quite right, now, is it? You’re a manufacturer and not necessarily a dealer. So the NAICS code would start with a string of numerals more like 4420, which is rubber tire manufacturing.  The NAICS sorts businesses for the purpose of gathering, analyzing, and then publishing statistical data related to the United States economy. The NAICS industry codes thereby define establishments as based on the activities in which they are mainly engaged.

In our tires example, the NAICS has several codes corresponding to all sorts of stops that tires make along the way from manufacturing to end user. This includes different types of wholesalers and retailers and the like.

However, the NAICS coding system is not the only coding system out there. Here’s another which is often used.

SIC Codes

A Standard Industry Classification code, or SIC, is an indicator of the kind of business a company is in. The Securities and Exchange Commission developed this system. For example, in our tires case, then your SIC code would be 3011. The numbers are somewhat intelligent in that there are ranges of industry groups which correspond to the first of the four digits, such as manufacturing corresponds to four digit SIC codes that start with either a 2 or a 3.

The combination of the first and second digits then defines the major industry group. In our example, 30 designates ‘Rubber and Miscellaneous Plastic Products’.

Which do the banks and the credit bureaus use?

They use both. Lenders and credit bureaus want to as accurately as possible determine if your company is in a high-risk industry classification. If it is, then you could get a denial for a business credit card or a loan as based upon your business classification. Some NAICS codes will trigger automatic turn-downs, and higher premiums, thereby reducing credit limits for your business.

You must be careful when you choose an NAICS code for your company. The Internal Revenue Service will use the NAICS code that you select, 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.

Furthermore, some companies are labeled high-risk when they do not select the right NAICS codes to classify their company. However, if you understand how the business classification system works, then you can choose the correct code on your first try.

Let’s go back to our tire example on how to choose the proper NAICS code for your business. The first two digits of the SIC code will identify the major industry group, the third digit will identify the industry group, and then the fourth digit will identify the industry.

Here’s how you to choose the correct NAICS code for your company:

  • Go to naics.com
  • Use their search function
  • Select the closest fit – if there is no good fit, search again

There are certain NAICS codes which will get you a loan denial if you choose them for your business classification. So before you choose your SIC code and your NAICS code be sure that you look over this list before you begin to build your NAICS codes. Here are some high-risk codes that you should be aware of:

  • Automotive sales
  • Money lending and collecting
  • The travel industry
  • Real estate investing
  • Anything else with reference to investing of any type
  • Adult entertainment
  • Restaurants
  • Dry Cleaning establishment

For automotive sales, for example, you would normally select 441110, ‘Automobile dealers, new only or new and used’. However, most lenders will automatically turn your business down because of the high-risk factor within the business classification name. Of course you want to be honest with your NAICS coding classification. However, if more than one NAICS code could apply, there is nothing wrong with choosing the NAICS code which will not get you denied by lenders.

Therefore, if you want to have your automobile sales company, you need to develop a business code which has something such as automotive parts written in the actual business code. That way, you can still operate your real business of “automotive sales” without actually being considered a risk factor.

Choosing the incorrect NAICS code could end up costing your business and get you labeled as high-risk. And this could directly impact your insurance premiums, your financing ability, and even your credit limit recommendations. This small error of selecting the incorrect NAICS code could cost your business in the future. Therefore, be sure to do your research before you select an NAICS code for your business.

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