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High-risk industries face numerous challenges. Arguably, one of the most impactful is limited access to funding and payment services.
You can better determine whether or not you fall into such an industry with NAICS Codes. Some businesses with high-risk codes may have to jump through more hoops while others are turned away entirely.
But what are the high-risk codes? What can you do if your business has one? Let’s take a closer look at high-risk NAICS Codes and how they affect your business.
High-Risk NAICS Code Industries
There are several high-risk NAICS Code industries to be aware of. According to the North American Industry Code System Association, the high risk NAICS codes are:
- 441110 : New Car Dealers
- 441120: Used Car Dealers
- 441210: Recreational Vehicle Dealers
- 441222: Boat Dealers
- 441227: Motorcycle, ATV, and All Other Motor Vehicle Dealers
- 441330: Automotive Parts and Accessories Retailers
- 561510: Travel Agencies
- 713210: Casinos (except Casino Hotels)
- 811111: General Automotive Repair
- 811114: Specialized Automotive Repair
- 811121: Automotive Body, Paint, and Interior Repair and Maintenance
It’s important to remember that this list only covers some of the high-risk industries. To access the full list of risky NAICS codes, see this public spreadsheet.
Alongside these industries, there are also restricted industries.
Those operating within these industries might be automatically rejected by lenders and creditors:
- Businesses that manufacture weapons and ammo for retail or wholesale
- Bail bonds businesses
- Check cashing agencies
- Those in the finance sector (mortgage bankers, foreign banks, etc.)
- Energy, oil trading, petroleum production, and petroleum extraction
- Those engaged in gambling or gambling activities
- Loans designed for securities or goods
- Pawn shops
- Political-related entities
- X-rated entertainment or products
- Public administration
Granted, this may not apply to your business specifically. However, it can illustrate what type of businesses creditors and lenders may turn away for credit products.
How NAICS Codes Have An Impact on Your Ability To Get Financing
NAICS Codes inform lenders and creditors as to what industry you operate in. But how does this determine whether or not they decide to fund your business?
Supplying a NAICS Code to a prospective lender tells them certain things they need to know about your business. They will consider factors such as:
- The average business failure rate in that industry
- How cash intensive the business is
- If your business is seasonal
- Industries the lenders don’t like
Choosing the right NAICS Code is critical to securing the most funding possible on the best terms.
How You Can Avoid High-Risk NAICS Codes
Avoiding high-risk NAICS Codes is often much simpler than it sounds. This, of course, depends on whether or not your business might not be considered high-risk. Here are some tips to help you avoid high-risk NAICS Codes in your business.
- Figure out which codes are applicable to your operations. Some businesses could be considered to fall under multiple industries. This can work to your advantage. However, it’s important that you’re honest about your business activities. Otherwise, it could negatively impact you.
- Choose a NAICS Code that will grant you access to funding over one that could restrict you. You want to be able to access the most funding possible without being affected by undesirable terms. This may require more research on your end, but you will be able to get through it quickly with a smaller list.
- Make sure that you’re using the same NAICS Code everywhere. Otherwise, you might end up being misclassified. This could land you in hot water with government agencies and the IRS, not just lenders and creditors.
You can follow these steps regardless of whether you’re just getting set up or figuring out NAICS Codes late.
Is It Possible to Have More Than One Primary NAICS Code?
Those who fall into several industries might wonder whether they should have multiple codes.
The good news is that you need only one primary code. You can only have one primary NAICS Code at a given time.
That being said, businesses can have several secondary NAICS Codes. This can tell agencies more about your business and which sectors it operates in. It may even be necessary if you have multiple products or services that your business sells.
Keep in mind though that you should only have one primary code you’re using for your business. Don’t use codes interchangeably on various forms. You can end up making a bigger mess in the process.
This brings us to our next point.
Can You Change Your NAICS Code?
Using the wrong NAICS Code may be the issue you’re currently struggling with.
But can you change it once this code has been used for various agencies?
Figure out what your NAICS Code is listed as and which agencies have that code in their system. Then, reach out to them individually to communicate the issue. They will work with you to update your code.
This can be a long process. If you’re a prospective business owner, make sure to get your NAICS Code right the first time around.
Financing Options for High-Risk Industries
Being in a high-risk industry can prevent you from accessing the same opportunities as low-risk industries. However, it doesn’t mean that it’s impossible to secure funding. There are financing options for high-risk industries.
Here are a few suggestions for your business.
Find Niche Industry Financing Companies
A niche financing company may be better suited for your needs. Rather than a general financing company, a niche industry company knows your business. They know what’s going to see success and what’s required to do it.
Granted, they may not offer the same amount of funding that you might see through traditional avenues. But when you’re feeling strapped for cash and wishing to grow, they can be a helpful resource.
See if you can find one in your area. For example, you may be able to get small business loans in Virginia or Florida for your business.
Collateral-backed financing is typically one of the more accessible options for high-risk businesses.
Lenders will normally give you funding knowing that you’re capable of paying it back. But what if you pose a greater risk? In this case, you can get funding backed by collateral.
Collateral may look like anything from cash, securities, or other assets. If you default, they have this to fall back on. This keeps both you and the lender happy (as long as you pay back your loan).
Take your time to shop around and look for terms that work for your business. While you may have fewer options, you don’t want to have to settle. Taking on financing with outrageous terms could put your business finances at risk.
Build Your Business Credit
The two suggestions above are great places to start. But you also want to make sure that you’re building your business credit score along the way. A higher business credit score proves your reliability to lenders. You can then access more funding with better terms.
But how do you get started? You can build your business credit without using personal credit by:
- Establishing your business by getting an EIN, a business checking account, and related items.
- Applying for a DUNS number, which will often be required on applications and used by vendors.
- Leveraging products like credit builder loans loans to develop a credit history.
- Choosing business tradelines that report to the three major business credit bureaus. These include Equifax, Experian, and Dun & Bradstreet.
- Making sure to make on-time or early payments to build and maintain your score.
- Avoiding judgments, liens, and other harmful financial developments that could impact your score.
Having the wrong NAICS Code can have an impact on your ability to receive financing. In some cases, you may have the wrong code because you misinterpreted your industry. You may even be in a high-risk industry and looking for funding opportunities.
Whatever your NAICS Code, use the guide above to navigate high-risk codes and their impact on your business.
Dylan Buckley is a freelance finance writer and editor with 7 years of professional experience. Specializing in personal finance, cryptocurrency investments, and Fintech, Dylan is deeply passionate about creating content that helps readers make informed, confident financial decisions. He studied finance in college and maintains a credit score over 780.