High Limit Business Credit Mistake to Avoid and Prevent Automatic Denials: Avoid High Risk NAICS Codes

Do you know how to avoid high risk NAICS codes? And build your Fundability™? And what does any of that have to do with how financial institutions view a business? But before we go any further, just what is a NAICS number, anyway?

Higher Risk NAICS Codes

Cash Intensive Businesses

• Tobacco product and electronic cigarette merchant wholesalers – 424940
• Shoe retailers – 458210
• Home centers – 444110
• Sporting goods retailers – 459110
• Paint and wallpaper retailers – 444120
• Hobby, toy, and game retailers – 459120
• Outdoor power equipment retailers – 444230
• Sewing, needlework, and piece goods retailers – 459130
• Nursery, garden center, and farm supply retailers – 444240
• Musical instrument and supplies retailers – 459140
• Convenience retailers – 445131
• Book retailers and news dealers – 459210
• Vending machine operators – 445132
• Florists – 459310
• Beer, wine, and liquor retailers – 445320
• Office supplies and stationery retailers – 459410
• Furniture retailers – 449110
• Gift, novelty, and souvenir retailers – 459420
• Floor covering retailers – 449121
• Used merchandise retailers – 459510
• All other home furnishings retailers – 449129
• All other miscellaneous retailers – 459999
• Electronics and appliance retailers – 449210
• Full-service restaurants – 722511
• Department stores – 455110
• Limited-service restaurants – 722513
• Pharmacies and drug retailers – 456110
• Cafeterias, grill buffets, and buffets – 722514
• Gasoline stations with convenience stores – 457110
• Parking lots and garages – 812930
• Clothing and clothing accessories retailers – 458110
• Other grantmaking and giving services – 813219

High Risk Industries (subject to stricter underwriting guidelines):

• New car dealers – 441110
• Travel agencies – 561510
• Used car dealers – 441120
• Casinos (except casino hotels) – 713210
• Recreational vehicle dealers – 441210
• General automotive repair – 811111
• Boat dealers – 441222
• Specialized automotive repair – 811114
• Motorcycle, ATV, and all other motor vehicle dealers – 441227
• Automotive body, paint, and interior repair and maintenance – 811121
• Automotive parts and accessories retailers – 441330

MSBs (Money Services Businesses)

• Consumer lending – 522291
• Other activities related to credit intermediation – 522390
• Financial transactions processing, reserve, and clearinghouse activities – 522320
• Commodity Contracts intermediation – 523160

NBFIs (Non-Bank Financial Institutions)

• Jewelry, watch, precious stone, and precious metal merchant wholesalers – 423940
• International, secondary market, and all other nondepository credit intermediation – 522299
• Jewelry retailers – 458310

NAICS Codes

So the North American Industry Classification System, or NAICS, has its own six digit coding system. This code classifies business establishments for the purpose of collecting, analyzing, and publishing statistical data related to the U.S. business economy. NAICS industry codes define establishments based on the activities in which they are primarily engaged.

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.

How the NAICS Works

The NAICS sorts businesses for the purpose of gathering, analyzing, and then publishing statistical data related to the United States business economy. The NAICS industry codes thereby define establishments based on the activities in which they are mainly engaged.

In our tires example, the NAICS has several codes. They correspond 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.

Low Risk NAICS Codes vs. High Risk NAICS Codes

The NAICS puts out its own list of high-risk and high-cash industries. Higher risk industries on the high risk business list include casinos, tobacco wholesalers, and furniture retailers, but also automotive dealers and restaurants.

Do you have a high risk business? Then the industry codes NAICS will reflect that on your business credit report.

OSHA requires injury and illness reports from certain high-risk industries.

Keep in mind, that list of high-risk and high-cash industries is a few years old and potentially incomplete, and there are no plans to update it.

However, the NAICS coding system is not the only coding system out there affecting business credit files. Here’s another which is often used. It’s something to pay attention to, for business credit building purposes.

Business SIC Codes

What is a SIC number? The SIC Code (Standard Industrial Classification) is a part of another business classification system.

A Standard Industry Classification code, or SIC is a four digit numerical code which is assigned by the federal government to businesses, to make it easier to identify the primary activity of the business.

This 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 small business SIC codes. In our example, 30 designates ‘Rubber and Miscellaneous Plastic Products’.

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 where to find NAICS code on tax return – your tax return.

Low Risk SIC Codes for Businesses vs. High Risk SIC Codes

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.

Which Coding System do the Banks and the Business Credit Reporting Agencies Use?

Business credit bureaus and small business lending institutions use both. However, the SIC code system is phasing out and NAICS codes 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 see 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 based on your business classification. Some SIC codes can trigger automatic turn-downs, higher premiums, and reducing credit limits for your business.

You must be careful when you choose NAICS codes for your company. The Internal Revenue Service will use the NAICS code that you select. This is 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 subject to an audit.

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

True Injury Risks According to the CDC

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 it can show what may be behind some of the reasoning. This could be the answer to what is NAICS code used for.

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 cash intensive businesses.

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.