Do you know how to avoid high risk NAICS codes? And build your Fundability™? Without further ado, here are the higher risk NAICS codes.
High 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 wholesale trade – 423940
- International, secondary market, and all other nondepository credit intermediation – 522299
- Jewelry retailers – 458310
Refer to the U.S. Census Bureau website for more NAICS codes and to learn the basic functionalities of the system. You can also visit the U.S. Federal Register to see updates. Remember that you can only get definitive information from official websites!
What Are NAICS Codes?
So the North American Industry Classification System, or NAICS, has its own six-digit coding system. This code classifies the total US business entities for the purpose of collecting, analyzing, and publishing statistical data related to the US 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, which the United States government uses for publishing statistical data related to the business economy in North America. 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. In contrast, low-risk industries include those that are less at risk of economic volatility, such as:
- Public administration
- Technical services
- General management consulting services
- Social assistance
- Software publishers
- Administrative management
Are you in a high risk industry? Then the specific industry code will reflect that on your business credit report, which may affect your business credit score.
OSHA requires injury and illness reports from certain industries with higher risk.
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.
SIC classifications are an indicator of the kind of business a company is in. The Securities and Exchange Commission developed this business intelligence 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 that 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 the NAICS code on your 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?
This is another frequently asked question. To put it simply, 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 business loan or a business credit card based on your business classification. Some SIC codes can trigger automatic turn-downs for business loans, higher premiums from an insurance company, and reduced 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 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 financing 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 NAICS codes are 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 that 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 it’s a tempting target for thieves.
Avoid High-Risk Codes by Choosing Better NAICS Codes
Let’s go back to our tire example for choosing the proper NAICS code for your business. The first two digits of the SIC code will identify the major industry group. Then for the business activity code NAICS, the third digit will identify the industry group. And then the fourth digit will identify the industry. This is how these agencies classify businesses.
Now you should learn how to get a NAICS code.
Here’s how to get the NAICS code for your company:
- 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
- If you are a small business owner, check the size standards set by the Small Business Administration
Keep in mind that NAICS Association will ask for business information like company name and business phone number. However, providing personal information for marketing materials is voluntary.
You Can Avoid High-Risk NAICS Codes
There are certain high-risk NAICS codes that will get you a loan denial if you choose them for your business classification. So before you choose your SIC code and NAICS codes, look over the high-risk industries list of cash-intensive businesses and more. Do so before you begin to build your NAICS codes.
Here are some high-risk industry codes you should be aware of:
- Automotive sales: new car dealers – 441110; used car dealers – 441120
- Travel agencies – 561510
- 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, including being a real estate agent)
- Finance businesses and money lending and collecting: financial transactions processing, reserve, and clearinghouse activities – 522320; other activities related to credit intermediation – 522390; consumer lending – 522291
- Jewelry retailers – 458310
- Restaurants: full-service – 722511; limited-service – 722513
- Tobacco product and electronic cigarette merchant wholesalers – 424940
Avoid High-Risk NAICS Codes: Back to Our Example for a Moment
But what is the NAICS code? 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, don’t worry. There is nothing wrong with choosing company NAICS codes, and it will not get you denied financing.
Therefore, if you want to have your automobile sales company, you need a low risk NAICS code which has something like automotive parts written in the actual business code. That way, you can still operate your real business of “automotive sales” without being considered risky.
You’ll be fine, even as lenders search companies by NAICS code, using an NAICS lookup by company name. A better NAICS code can be the difference between business funding – and no funding.
Avoid High-Risk NAICS Codes: Takeaways
Choosing the incorrect NAICS code could end up costing your business and get you labeled as high-risk. So this could directly impact your insurance premiums, your financing ability, certain government agency support, 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.
