Getting red flagged by the business credit bureaus can be a nightmare for a business trying to establish business credit. As a result many lenders will automatically decline your application for credit without looking any further.
In addition, business credit bureaus like Dun & Bradstreet will minimize the credit limit recommendation for your company on your DNB file which lenders take a close look at prior to deciding how much credit to extend your business.
So what can cause a business to get red flagged?
One of the most common ways to trigger a red flag is by selecting an SIC code for your business in a high risk classification.
An SIC code (Standard Industrial Classification) is a four digit numerical code assigned by the U.S. government to businesses in order to identify the primary function of the business. The first two digits of the code identify the major industry group, the third digit identifies the industry group and the fourth digit identifies the industry.
For example:
36 ELECTRONIC & OTHER ELECTRIC EQUIPTMENT
367 ELECTRONIC COMPONENTS & ACCESSORIES
3672 PRINTED CIRCUIT BOARDS
You’ve probably also heard about another code called NAICS (North American Industrial Classification) which replaced the SIC code back in 1997. This took the 4-digit (SIC) code to a 6-digit (NAICS) code system.
The main reason why this new system was introduced was because the SIC classifications were outdated and didn’t reflect some of the new industries that have re-shaped the U.S. and global economy.
The United States, Canada and Mexico share the first five digits within the NAICS structure. The sixth digit is designed for country specific classifications and may be different from one nation to the next.
However, both of these codes are universal numbering methods that help identify what industry your company is in and breaks it down into more detailed segments. While the old SIC Codes are still widely used, the Federal Government no longer supports and maintains the system.
For business credit purposes you need to select an SIC code for your business because Dun & Bradstreet continues to use SIC codes to this day. You’ll be required to furnish this code when setting up your profile with DNB so be sure to record the number you select for your records.
Before you select an SIC code and NAICS code there are certain industries or codes that are flagged as high risk. Stay away from picking codes that relate to the following industries:
- Real estate investing or anything else regarding investing of any type
- Car sales
- Adult entertainment
- Travel industry
- Money lending/collecting
- Restaurants
- Dry Cleaners
If you plan on investing in real estate then you will want to make sure that the company you build credit on is not “real estate investing”. Most banks will automatically turn you down because this is a high risk category.
You still will be able to invest in real estate but you may have to set up a business that does business development, business management, business consulting, marketing & advertising, training and development, etc. and then operate your real estate investments from a separate division or company that does something else.
As you can see selecting the wrong code can get your business red flagged by the business credit bureaus and directly impact your business credit building capability. Don’t make this small mistake that can cost your business future problems.
Marco Carbajo is founder of the Business Credit Insiders Circle, a step-by-step business credit building system. You may contact Marco directly at: ceo@startbusinesscredit.com
Follow Marco on Twitter @MarcoCarbajo and read more of his insights on business credit for small business.
