Published By Janet Gershen-Siegel at October 16th, 2018
Is your business a risky one? How can you tell? Risky business codes and names will tell the tale.
Not all businesses are the same. There are qualitative differences, to be sure, between day care centers and car washes, long haul trucking companies and laundromats. These dissimilarities do not just come from the variety of industries.
Rather, the difference has to do with risk.
When considering any aspects of a business, risk has to be a major factor. There are inherent issues in every single industry. Crops fail, lease terms go up too high so a company has to move, or tariffs or even a war make importing less reliable.
But some businesses are considered to be risky by their very nature. And this is the case even if everything else goes off like a hitch and the business is prospering. Risk is inherent within these business types. Therefore, even if your business doesn’t feel risky, it might be anyway.
The biggest reason why risk matters has to do with funding. There are several industries where lending institutions are hesitant to do business. In those particular cases, there are stricter underwriting guidelines. But at least a company can get funding.
Not so with other industries. In some industries, no funding is available at all. As a result, those businesses will need to find other solutions for financing. These solutions can include, potentially, crowdfunding, angel investors, venture capital, business credit building and more.
But a lot of businesses would rather work with lenders. And then it all comes down to two separate types of codes which lending institutions use to judge your business.
The SIC Code (Standard Industrial Classification) is a part of a business classification system.
A Standard Industry Classification code, or SIC is a four digit numerical code which is assigned by the U.S. government to businesses, to make it easier to identify the primary activity of the business. It is an indicator of the kind of business a company is in.
The Securities and Exchange Commission developed this system. For example, if your company makes tires and/or inner tubes, then your SIC code would be 3011. The numbers are somewhat intelligent. This is because there are ranges of industry groups which correspond to the first of the four digits, such as manufacturing corresponds to four-digit SIC codes which 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 will designate ‘Rubber and Miscellaneous Plastic Products’.
The SIC code’s digits are grouped to identify the industry and industry group. The first two digits in the SIC code identify the major industry 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.
Furthermore, some companies may be labeled high-risk when they do not select the right SIC 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.
The North American Industry Classification System (NAICS) is another business classification code.
This code classifies business establishments for the purpose of collecting, analyzing, and publishing statistical data related to the U.S. economy. NAICS industry codes define establishments based on the activities in which they are primarily engaged.
The NAICS puts out its own list of high-risk and high-cash industries. Higher risk industries on the list include casinos, pawn shops, and liquor stores, but also automotive dealers and restaurants.
OSHA requires injury and illness reports from certain high-risk industries.
They both are. However, the SIC code system is phasing out and NAICS will replace it. But for the moment, assume they are both in play, as the transition has not yet finished. These coding systems are similar but not identical.
Lenders, banks, insurance companies and business credit reporting agencies use the two business classification systems to determine if your business is a high-risk industry classification. This means that you could get a denial for a loan or a business credit card. And it would be based on your business classification. Some SIC codes can trigger automatic turn-downs, higher premiums, and reducing credit limits for your business.
In 1999, the Centers for Disease Control published an article on risks in small businesses. This article contains information on SIC codes and gives information on injuries associated with the codes. While this is not the true means by which lending institutions decide on risk, it is still of interest and can demonstrate what may be behind some of the reasoning.
Part of the calculus of risk comes from occupational injuries such as those noted in the CDC report. But the other side of the risk coin is occupations which are high in cash transactions. After all, a pawn shop might not have much of a specific risk of injury at all. But the large amounts of cash normally associated with one mean that it’s a tempting target for thieves.
The choice of SIC code is yours. For automotive sales, for example, you would normally select 5511, ‘Motor Vehicle Dealers (New and Used)’. However, most lenders will automatically turn your business down. This is because of the high-risk factor within the business classification name. Naturally you want to be honest with your SIC coding classification. But if more than one SIC code could apply, that’s okay. There is nothing wrong with choosing the SIC 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 auto and home supply stores, motor vehicle parts and accessories, or car washes 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.
Check the SIC code database for more information on these codes.
There’s more beyond coming up with the perfect memorable name which is easy to spell and say, and evokes your company’s mission statement. There’s also the matter of risk. Adding a risky business type into your business name will trigger financing denials.
For example, bail bonds are a restricted industry. So are many types of financing business types, and check cashing agencies. Hence naming your venture Chico’s Bail Bonds is a recipe for a delay if not an outright denial.
But there is nothing deceptive, illegal, or unethical in naming your company Chico’s.
Will this more generalized name guarantee funding for your business venture? Of course it won’t. But at least your business will not be automatically turned down before you can make your case for funding.
Lending institutions identify higher-risk industries based upon SIC and NAICS codes, along with a cursory review of the business’s name.
Keep your financing options open and avoid automatic turndowns and delays by carefully selecting your SIC and NAICS codes. And proactively name your business the right way, in order to give it a fighting chance of getting financing.
Wikipedia definition of SIC: https://en.wikipedia.org/wiki/Standard_Industrial_Classification
SEC on SIC codes: https://www.sec.gov/info/edgar/siccodes.htm
Census.gov on NAICS codes: https://www.census.gov/eos/www/naics/
NAICS list of high-risk and high-cash industries: https://www.naics.com/wp-content/uploads/2014/10/NAICS-ASSOCIATION-High-Risk-and-Cash-Intensive-NAICS-Codes-List.pdf
OSHA requirements for certain high-risk industries: https://www.osha.gov/recordkeeping/NAICScodesforelectronicsubmission.pdf
CDC article: Identifying High-Risk Small Business Industries
Page 56 – 61 (Table 4) – this is a listing of higher risk occupations according to the CDC. Note larger numbers under various automotive industries and cleaning industries. This coincides with the list of high-risk industries.
See also Figure 1 (page 65) and Figure 2 (page 66); both of these show nonfatal injuries.
SIC Code database: https://www.usbizdata.com/sic-code-databases.php
What frustrates you the most about risky business codes and names?