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What Lenders and Credit Issuers Want to See:

Before they look at your credit profiles and utilization to determine if you can manage the debt, before they look at your inquiries, before they look at your financials (tax returns, bank statements, paychecks, etc)...

Remember they only care about 2 things:

Your willingness to pay them back (based off your business and personal credit profile).

And your ability to pay them back (your revenue, financial statements)

Before they look those things, the FIRST thing they're checking is what industry you're in. That determines whether you're a high risk or low risk business owner. THAT'S WHAT WE'RE TALKING ABOUT TODAY....a deep dive to determine which one you should choose and why.

With that said, let's look at What NAICS codes are, How it works, What it's used for and How YOU can make sure you have the right code listed in the right places to radically improve your chances of getting approved for credit, financing and getting the most money at the best terms! 👊

1. What's an NAICS CODE and WHY is This Important

North American Industry Classification System (NAICS) codes are a 6-digit identifier used organizations like the SEC, the Federal Government and the IRS to identify what a business does and the sector it operates in.

The main purpose is to collect, analyze, and publish statistical data related to the business economy. Banks, insurance companies, and other financial institutions review NAICS codes to assess risk which can affect the financing terms for small businesses.  There are 20 sectors and over 1,000 industries in the United Sates NAICS system.

​Each number has a different meaning. The way the system works is as follows:

• The first and second numbers designate the economic sector a company operates in

• The third number designates the sub-sector of the company

• The fourth indicates the industry group the company belongs to

• The fifth identifies the specific industry of the company

• The sixth number identifies the national industry the company belongs to

Your NAICS code can affect your ability to secure small business loans from investors and financial institutions and helps lenders determine the level of risk that is involved when considering providing you a loan.​

2. Who Looks At This

Lenders and credit issuers will put you in 2 buckets if they think you're high risk. If so, that either means: 

• You're placed in what's sometimes referred to as, "Facing greater underwriting scrutiny." Basically more stringent underwriting guidelines – so that means you get a manual underwriting and they ask for more documentation and it's harder to get approved. And you'll typically get approved for worse terms.

•  Or they put you in a restricted bucket which means you’re prohibited 🚫 from getting financing form that source altogether. This one's a no go. So a perfect tone here is marijuana industry . A lot of lenders don't lend here cause it's legal in states but with federally its still a grey area. So if you submit and you're in the marijuana industry, you immediately are in a restricted industry and automatically denied.

Business credit reporting agencies. First of all, they'll automatically lower your risk scores if you're in a higher industry. So you get higher interest rates, lower approval amounts (cause your NAICS code shows a high risk industry). Also used by the bureaus for comparison scores to evaluate your risk. So not only are they looking at your risk overall against all the data they have, but if you're, say, a Restauranteur, they're also looking at your risk compared to other restaurants (remember our trucking example too).

Insurance companies look at this to determines your rates, terms and even the premium you pay.

Investors is another thing. So, if you're looking for an exit strategy to sell your company once you 10x it. This could help determine your VALUE. Because it'll be a different valuation fi it's a software company, a real estate company, a trucking company - those are all 3 different valuations based on the industry you're in. Obviously, other factors and variables go into that as well (products and services, but also economic and market forces, like product-market fit, influencing risk factors within an industry).

Government Contracts. The system was developed for statistical analysis, however, various government agencies, trade associations, and regulatory boards have adapted the NAICS classification system for their internal needs.Some of these agencies post contract bids to any business within a given NAICS code, such as the SBA through the System for Award Management (SAM). Other government entities may offer tax incentives to businesses within a given NAICS Classification. So this can also determine if you'll get approved based on the industry you're in. ​​

👉So having the right codes is ESSENTIAL to be able to be seen the way you wanna be seen by all these entities and organization INCLUDING lenders and credit issuers wanting to give you more money.

3. The Biggest Mistake New Businesses Can Make

#1 BIGGEST MISTAKE is choosing the wrong code or NOT CHOOSING ONE AT ALL, releasing your control and letting them select it for you. That's the worst thing you can do. So if you're going and they ask and you don't know, they're gonna choose one for you and nine times out of ten they're gonna choose the wrong code and it's gonna do 1 of 2 things: 

Get you denied OR Limit your funding (instead of 25k now you got 2k cause you let them choose as opposed to understanding this system, THEN LEVERAGING THE SYSTEM).

*Even on the credit application, they ask this. So you need to know it.

4. Let's Unpack How and What to Choose Based On the Industry We're In

This is one of the biggest questions I get. " Hey Dominique, I'm in accounting - what code should I choose? Hey I'm in cleaning, what code should I choose?" Well, let's break it down so you can choose moving forward ok? And BE CAREFUL. For example, someone asked me what's the NAICS code for transportation? Well, that's the problem with not knowing your code.

If you look at the NAICS category for transportation, you'll find there's 100 different sub categories within that one category. This is why you really need to know exactly what your NAICS code is. WHY? Because if you walk in to tell a banker you're in the transportation category, what they're gonna do is choose one of those 100 subcategories.

And if you make them choose they're almost always gonna make the decision to put you in a high risk category or the wrong one. So don't let them choose for you. Go to naics.com, do a free search and find the best designator of the category you're in.

5. Avoid High Risk NAICS Codes

We can easily do a google search for high risk and find lists of different codes that are seen as that but lenders, credit issuers, IRS and avoid being put in one of those categories. Now do not lie AND MISLEAD. What I'm saying is you can often be one of three.

So those are the kind of things you wanna factor into your decision. What gives you the best MULTIPLE if you ever go to seller x of the business BUT what also puts you in a lower risk category and if you, like us (DominoFX Group), can be in multiple categories, then make sure you stay away from those high risk categories you can find. 

Certain NAICS codes are considered “high risk” due to various factors that impact business stability and profitability. 

Here's some examples of higher risk NAICS codes:

Restricted Industries (automatic decline):

• Ammunition or Weapons Manufacturing; wholesale and retail.

• Finance: Federal Reserve Banks, foreign banks, banks, bank holding companies

• Gaming or Gambling Activities

• Pawn shops

• Political campaigns, candidates, or committees

High-Risk Industries (subject to stricter underwriting guidelines):

• Computer and software related services.

• Dry cleaners

• Entertainment (adult entertainment is considered restricted).

• General contractors

• Gasoline stations or convenience stores (also known as c-stores)

• Healthcare: specifically nursing homes, assisted living facilities, and continuing care retirement centers.

• Hotels or motels

  

More High-Risk Industries

• Jewelry, precious stones, and metals; wholesale and retail

• Limousine services

• Long distance or “over-the-road” trucking.

• Real estate agents/brokers

• Real estate developers or land sub-dividers

• Restaurants or drinking establishments.

• Travel agencies

Check out this link to other high risk NAICS codes.

Before you choose your 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 industries 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)

• 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

6. Now How Do You Use It

First of all, make sure your tax returns all reflect that same NAICS codes. ​You need to tell  your accountant when you file your taxes the exact NAICS code you're in and make sure if you have business credit reports established, the agencies know what your NAICS code is. 

So pull your reports – they'll tell you right away. IF IT'S WRONG go in and update with all 3 reporting agencies, Equifax, Experian and Dun and Bradstreet.

Make sure your bank knows as well. Your bank IS part of an overall system where all banks openly share info. It's call the SBFE (Small Business Financial Exchange). Make sure they have it cause they all see. By the way, the business credit reporting agencies  are vendors of the SBFE. They're members that take that data and put it out to the world which is why you wanna make sure you, banks, and the credit bureaus have the correct reporting information. 

Once you you've done this, make sure when you're applying, it's under the right NAICS code, exactly what it is so there's no questions if you've done this correctly, it should all line up and it's accurate. ​

7. Going Into and Starting Your Business

Now I know we covered a lot, but if you choose the right the code and the right business name, you'll be fine. Don't over think it but absolutely make sure you take your time and give this some thought. Make sure you're cross-referencing your categories against the high risk categories we listed above.

Remember you don't wanna give lenders and credit issuers different information when you're out here. Giving one code on one end and another code later. Now the information doesn’t' match; It's not congruent. Remember they share your information, the SBFE takes a look at it. They're gonna take one look at you and go, "well they have this code here and another one here. Oh! this much be a fraudulent business, we don't want to deal with it," and now you're out of the game. So make sure every time you write this code down, it's the same across the board.

And that goes for ALL information, so make sure your business name, business address, business email is the same and your NAICS code matches on all platforms. Ensure you take these steps will make sure you have the highest scores, make sure you're seen as low risk and radically improve your chances of getting approved for financing. 

8. How to Build Your Business Credit

Like personal credit, building business credit is a process that takes time. But you can jumpstart it using 4 key steps.

First, take care of the fundamentals like getting an EIN, opening a business bank account, and applying for a DUNS number. 

Next, get a business credit card, ideally with favorable terms and a reasonable interest rate. You may be somewhat limited with your options initially, especially if you’re a small business owner just starting out or have bad credit. But as long as you make your vendor payments on time or early, you may be able to negotiate better terms with your bank or credit union and potentially secure a higher credit limit. Or at the very least, this can help you establish a good credit history and open the door for a new lender later on while avoiding getting stuck with bad credit business loans.  

Third, look to secure business tradelines with vendors or suppliers that report to at least one major credit bureau. This kills two birds with one stone because it 1) gives you access to working capital with some repayment wiggle room and 2) helps you quickly establish a good business credit score.   

Finally, you can boost your credit report by using a tool like eCredable Business Lift, which reports business utility and telecom payments like electricity, internet, water, gas, and TV. This offers a simple way to quickly increase your credit score and build your business credit report by paying the bills like you’d be doing anyway.  Learn more about eCredable here.

Other resources to help you get started with NAICS Codes

Let's Recap...PLUS

Here is a quick checklist to get you started with you website blow. Remember imperfect action beats inaction, get started and keep publishing.

• An NAICS score tells a lot about how risky your business is, and it can cost you money. Your code can bring down your business credit score because it is recorded in your business credit report. It can also affect your eligibility and rates for a qualifying for a loan, especially if you are in a high-risk industry. If your business is classified under the wrong industry, it can make a difference whether your business is classified as small because different industries have different size standards. The code can also determine how many opportunities are available for your business.

• 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 NAICS.com
  2) In a separate tab cross reference the NAICS code with their list of High Risk and Restricted codes here.

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