How to Select a Business Classification Code

What's the best way to describe the principle business activity for your company? What type of industry are you involved in? What type of products or services do you sell? These are the questions I ask a new client during my initial business credit consultation to determine what would be the best type of business classification code for their company.

One simple mistake—such as selecting a high-risk classification code—can trigger a red flag on your credit file with the business credit bureaus. This could have a direct impact on your ability to obtain business financing.

Two types of business classification code systems

The two types of business classification systems used today are the Standard Industrial Classification (SIC) code and the North American Industrial Classification System (NAICS).

Lenders, insurance companies, and business credit bureaus use these systems to determine if your business is in a high-risk industry classification. Some classification codes can trigger automatic turndowns, higher premiums, and reduced credit limit recommendations on your business credit files, which is what I encourage my clients to avoid at all costs.

When I explain the pitfalls of business classification to my clients, most of them have extremely worried looks on their faces —but I reassure them not to worry because they can avoid being labeled as a high risk by first understanding how the business classification system works, and second by selecting the proper code for their business.

An SIC code is a four-digit numerical code assigned by the U.S. government to businesses in order to identify the primary activity of a 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 specific industry.

For example:

• 36 signifies electronic and other electric equipment.
• 367 is electronic components and accessories.
• 3672 is printed circuit boards.

For the most part, the NAICS replaced the SIC code back in 1997. This took the four-digit SIC code to a six-digit NAICS code system.

The new system was introduced because the SIC classifications were outdated and didn’t represent some of the new industries that have reshaped our country and global economy. Both of these codes are universal numbering systems that help identify what industry your company is in, and break that industry down into more detailed segments. While the old SIC codes are still widely used, the federal government no longer supports and maintains the system.

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For business credit purposes you need to select an SIC code for your business because Dun & Bradstreet (DNB) continues to use SIC codes to this day. You’ll be required to furnish this SIC code when setting up your business credit profile with DNB, so be sure to record the number you select for your records.

Industries commonly flagged as high risk

But before you select an SIC and NAICS code, know that there are certain industries or codes that are flagged as high risk. This is the list of high risk industries I advise my clients to avoid:

• Real estate investing or anything else that involves 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'll want to make sure that the company you build credit on isn't “real estate investing.” Most banks will automatically turn you down because this is a high-risk category. You can still invest in real estate, but you may have to set up a business that does business development, business management, business consulting, marketing and advertising, or training and development, for example, and then operate your real estate investments from a separate division or company that does something else.

To overcome the challenge of operating a business in a high-risk industry, you'll need to be creative in your approach. For instance, one of my clients who owns a full-service restaurant (NAICS code 722110) had established a separate marketing company (NAICS code 541613) that his restaurant hired for marketing consulting services. As a result, he's been very successful in building credit for his marketing company despite the fact that he works in a high-risk industry.

As you can see, selecting the wrong code can get your business labeled as a high risk and directly impact your financing ability, insurance premiums, and credit limit recommendations. Don’t make this small mistake that can cost your business future problems.

RELATED: Has Your Company Been Red Flagged by the Business Credit Bureaus?