You want to get the most affordable loan possible to grow your small business, but your NAICS code could be hurting you. Our content partner Nav explains how and why you should look at your classification.
You want to get the most affordable loan possible to grow your small business, but your NAICS code could be hurting you. Our content partner Nav.com explains how and why you should look at your classification.
Even if you didn’t choose a NAICS code for your business (or have no idea what an NAICS code is), you probably have one.
North American Industry Classification System (NAICS) codes are six-digit codes used by the federal government to classify businesses into an industry. The system was created for statistical purposes but is also used for non-statistical purposes, including determining eligibility to bid on government contracts and the risk level associated with your business for some loans and financing options. There are 20 sectors and more than 1,000 industries in the U.S. NAICS system.
Because there is no agency that governs how NAICS codes are assigned to businesses, these codes are largely self-assigned or assigned to your business by an agency collecting information on businesses. For example, the U.S. Census Bureau may assign an NAICS code to your business based on a survey you took. If you applied for an Employer Identification Number (EIN) on the IRS website, information from your application can be used to assign your business a code. This code will also show up on your business credit reports.
How Your NAICS Affects Your Wallet
How risky your business is determines whether or not you qualify for the best loans and financing options. Some industries, as determined by NAICS codes, are riskier than others, and your NAICS code tells a lot about how risky your business is in the eyes of a lender.
There are a number of ways your industry code can cost you money.
1. By bringing down your business credit scores
NAICS and SIC codes are recorded in business credit reports. The industry in which your business is classified can have an impact on your business credit score — for example, Experian’s business credit score uses your industry code as one factor determining your score. If you are incorrectly classified in a higher risk industry than the one in which you operate, it could be bringing down your business credit scores. These scores are then used by lenders, vendors and suppliers to qualify your business for trade terms, loans, and lines of credit.
2. By lenders determining your eligibility and rates for a loan
Lenders are going to want to know your NAICS code to qualify your business for a loan. Any given lender may deem some industries too risky to work with. Typical “high risk” industries include gambling, political lobbying and businesses involved in pyramid sale distributions, but the list goes on. The Small Business Administration, for example, has a long list of ineligible businesses that they will not work with for their popular 7(a) loan program based on operating activities.
3. Determining whether your business is “small”
The SBA uses size standards to determine if you are a “small” business. Only “small” businesses can qualify for government programs designated for small business, including the SBA’s loan programs and certain government contracting opportunities.
If your business is classified under the incorrect industry, it could make a difference whether or not you are classified as small because different industries have different size standards.
For example, let’s say you are a residential remodeler, but you started your business specializing in roofing. Your NAICS code may be 238160 for Roofing Contractors, when it in fact should be 236118 for Residential Remodeler. This might seem like it’s not worth the hassle of changing, but depending on your annual receipts, it could determine whether you are a small business. Roofing Contractors must have annual receipts of less than $15 million to be considered small, whereas Residential Remodelers can have annual receipts of up to $36.5 million.
The industry code may also determine how many opportunities are available for your business — in the case of our remodeling example, residential remodelers tend to have more opportunities available than specialized industries do.
4. Whether you qualify for contracting opportunities
Business opportunities presented by the federal government are offered to specific industries based on what the government buyer is looking for. The government uses NAICS codes to classify these solicitations for a business.
Here’s an example of where the industry code might show up on a solicitation form through fbo.gov:
This opportunity is set aside for NAICS code 236118, Residential Remodelers. If you are classified, instead, under NAICS code 236115, New Single-Family Housing Construction (except For-Sale Builders), you might miss this opportunity.
Although NAICS codes may seem a dry, complicated subject, taking the time to make sure (a) that your business has received one, and (b) that it’s accurate, could mean the difference between growing your business and being hung out to dry. You can check your business’s DUNS number, and your NAICS and SIC codes for free at Nav.
This article originally appeared on Nav.com and was re-purposed with their permission.
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