Risky Business Names

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Avoiding Funding Denials

What do Business Codes and Names Have to Do With Funding Denials?

Lenders see specific industries as particularly risky. If the company happens to fall under one of these categories, you can face automatic loan rejections. In the very least, you can face more stringent underwriting, higher premiums, and fewer favorable conditions. Lenders determine what market the company is in depending on a few factors. They start by looking at your company’s code, which may be a SIC or NAICS code. You must figure out a way to prevent automatic denials depending on the sector code or company name while still being truthful. Integrity is crucial, and lack of it can result in potential denials and even criminal charges.

What are SIC Codes

Business classification systems use Standard Industrial Classification (SIC). The US government assigns companies a four-digit number. The use of SIC codes makes it possible to pinpoint a company’s main operation. This code is used by lenders to determine the nature of a company’s operation. The SIC code system was developed by the Securities and Exchange Commission (SEC). The first four digits signify the general industry of a business. For example, 8711 refers to Engineering Services. Then, the numbers are added to the end of this four digit chain to add specificity. For example, 871103 is Engineers-Agriculture, while 871105 is Contractors- Engineering General. There are over 30 individual codes under the 8711 Engineering services code.

What are NAICS Codes?

A more modern company classification system is the North American Industry Classification System (NAICS). It is used to identify corporate institutions as well as to compile, interpret, and report statistical data about the US economy. Since SIC codes are more precise, there could be several SIC codes for each NAICS code. For example, as previously noted, there are over 30 SIC codes under the Engineering Services code 8711. The NAICS code for Engineering Services is 541330. While the plan is to fully switch to the NAICS system, many industries still have the old SIC system deeply ingrained.

Key Differences Between SIC and NAICS Codes

The United States government is the primary developer of SIC codes. SIC codes are used in the private sector to group establishments together depending on demand or development. The US, Canadian, and Mexican governments collaborate on the creation of NAICS codes. NAICS codes group together establishments that use the same or similar processes to produce goods or services, and are actively used for government statistical purposes.

Codes and the IRS

You choose a SIC code to submit to the IRS as a company owner. The IRS will use SIC codes to determine if your company’s tax returns are comparable to other companies in your industry. You may be audited if the deductions aren’t fair as compared to other industries in your sector under SIC code.

Codes and Risk

Certain codes are linked to sectors that are perceoved more dangerous than others. You can be refused funding if you use one of these high-risk codes. If you know how the system operates, you will be able to use the right code the first time around to prevent denials. Casinos, pawn shops, liquor stores, car dealers, and restaurants are also examples of high-risk businesses.

Risk, like every other area of industry, must be considered. Any industry code has its own set of problems. Nonetheless, by their very existence, some businesses are considered to be riskier than others. If there is a high risk of injuries to employees or consumers, a business can be considered dangerous. It can also be deemed dangerous as there is a high risk of robbery. This is true despite how the business is doing and its safety record or security system. Even if a business is doing great, it could be seen as risky simply due to the nature of the industry.

Risk and Funding

If the SIC code or NAICS code for your business is considered risky, it can make obtaining financing for your company challenging. There are a few markets in which lenders are reluctant to lend. Some of these industries are subject to stricter underwriting guidelines. In these situations, the company must search for alternative sources of financing. These options include angel investors, venture capital, crowdfunding, building company credit, and more.

What’s The Solution for Getting Funding With a Risky Code?

It is important to note that you get to pick your SIC code as the company owner. While you should be honest, you are allowed to be general. You don’t need to be any more specific than what is appropriate. Restaurants, for example, are dangerous, but if you still sell boutique products, you can use a SIC code for business instead. If more than one SIC code can apply, be sure to choose the one that is the least risky to lenders.

Business Names and Risk

As previously stated, the name of your company may indicate risk to lenders if it means that you work in a high-risk sector. For example, instead of naming your company “Joe’s Used Auto Sales,” you can simply call it “Joe’s.” There is nothing immoral or deceptive about using a general business name.

Business Codes and Names are Not The End Game

Of course, funding is not guaranteed by selecting a SIC code and business name that does not imply risk. A lender’s financing choice is also influenced by a number of other considerations, including fundability. However, if you use the incorrect code or business name, the lender can never see how fundable the company actually is.

What are the High Risk Industries

High risk industries include: Auto, RV or boat sales; Computer and software related services, including programming; Dry cleaners; Gas stations or convenience stores; Long distance trucking; Mobile or manufactured home sales; Phone sales and direct selling establishments; Real estate agents and brokers; Real estate developers or land subdividers; Restaurants or drinking establishments; Taxi cabs; and Travel agencies.

How Else are SIC and NAICS Codes Used?

Both codes serve more purposes than determining whether or not the company is fundable to lenders. These codes are used by the Department of Revenue for regulatory purposes. These codes may also be used to expand benefits provided by the government. To keep taxpayers in a particular sector informed of legislative reforms. The IRS uses these codes for a variety of purposes. They are used to classify products in relation to property exchanges or depreciation. If your data does not match those of those in your code for comparison purposes, you might be subjected to an audit. The SBA may also use these codes to categorize your business. When it comes to applying for government contracts, this is particularly true. Contracts must satisfy such requirements, and the SBA applies a specific size standard to each NAICS code. The SBA also uses NAICS codes to decide who is eligible for the Federal Contracting Program for Women-Owned Small Businesses. The Small Business Administration maintains a registry of eligible codes.

Recap

Businesses need capital, so if the company is considered to be in a high-risk market, you can be turned down. Lenders’ risk perceptions are influenced by SIC codes, NAICS codes, and company names. Choosing the incorrect code or name for your company could result in an unnecessarily delayed funding approval.