Did you know that the industry code your business falls under could affect your chances of getting business financing? Certain NAICS codes carry a level of risk that tells potential lenders a lot about your business. 

In this article, we’ll go over what constitutes a low-risk and high-risk industry and why it matters to your lender. 

What Are Some Low-Risk NAICS Codes?

Some industries have less risk associated with them than others. These industries have an easier time qualifying for business financing because of their low-risk status. 

Typically this means that the lender is more likely to have the loan repaid due to the business’s higher potential for profitability, consistent revenues, and reduced market volatility. 

Several industries fall into the low-risk category:

• Business management consulting
• Doctor’s offices
• Dentistry
• Educational services
• Software development
• Utilities

These industries also share some key factors that make them safer to lend money to from a bank’s perspective. Solid revenues, profitability, good credit scores, and length of time in business are all driving forces behind what minimizes the credit risk for a lender. 

Many times even if your business is in a high-risk category, you may still be able to qualify for funding as long as you meet the other criteria.  

What Types of Businesses Get The Most Funding?

According to the Federal Reserve’s 2022 Small Business Credit Survey the businesses that are most likely to get financing are in the manufacturing industry. 47% of these types of firms get the financing they applied for. 

The following types of businesses also get a significant amount of funding: 

• Physicians and doctors
• Dentists
• Alcohol
• Creative and marketing
• Software development
• Strategy and general consulting
• Electronics manufacturers
• Hotels, motels, and lodging

Although many of these are low-risk businesses, running a hotel or motel is considered to be riskier. However, they also receive a good portion of the available funding for small businesses. 

This goes to show that just because your business is considered high risk doesn’t mean that you can’t get a loan or business credit card. 

In a 2022 study by the Federal Reserve, 24% of business owners said they thought lenders didn’t approve financing for their business industry because it was too risky. 

So even though they needed the financing, they didn’t apply for it. Don’t let that happen to your business! The financing options are out there even if your business is considered high risk. 

High-Risk Industries To Avoid

High-risk industries are the ones that banks don’t want to work with. So these businesses have a difficult time qualifying for traditional funding. 

There are several reasons why an industry might be considered high-risk:

• The market is overly saturated
• There are inconsistent revenues reported for that industry
• The projected state of the industry
• The type of business model used within the industry. 
• Legislation in the industry changes constantly

Industries that fall into this category will likely have to find alternative methods of financing their business. Some businesses won’t even qualify for a NAICS code because of their industry type. 

Businesses applying for a loan under these industries will be met with an automatic decline. This makes finding financing much harder. These are the industries you should avoid: 

• Bail bonds
• Ammunitions or weapons of any kind
• Check cashing businesses
• Energy oil trading and petroleum extraction
• Casinos, gaming, and gambling activities
• Pawnshops
• X-rated products/ entertainment
• Political campaigns, committees, or candidates
• Public administration
• The realm of finance: Any type of bank or bank holding companies, loan brokers, commodity brokers, security brokers, mortgage brokers, mortgage bankers, mortgage companies, or mutual fund managers. 
• Loans for speculative purchases (securities or goods)

There are also high-risk businesses that are subject to stricter underwriting guidelines but they won’t be automatically turned down when applying for a small business loan or business line of credit. 

They are:

• Agriculture
• Courier services
• Hotels and Motels
• Transportation services (long-distance trucking, limousine services, taxis)
• Gas stations and convenience stores
• Restaurants and bars
• Real estate agents, brokers, and developers
• Travel agencies
• Wholesale and retail trade

In these cases, it may be helpful to look into crowdfunding, angel investors, or invoice financing as a means of funding the business if traditional funding considers your business credit risk to be too high. 

Why NAICS Codes Matter For Business Financing

Your NAICS code is a six-digit classification that says a lot about your business. It tells potential lenders what your business does, and allows the lender can compare your business to other businesses with the same NAICS code. So banks and financial institutions can see 

• Your potential for profitability
• What risks are commonly associated with your business type
• How likely you are to default
• Potential for longevity

While the main purpose of the NAICS code is to “Classify business establishments to collect, analyze, and publish statistical data related to the U.S. business economy.” by the US census bureau, it’s also used by potential lenders and insurance providers. 

Banks and insurance companies use NAICS codes to assess the risk associated with a business. It can have an impact on the interest rates and loan terms you receive as well as the insurance premiums you have to pay. 

For example, lenders analyzing a business in the trucking industry would find that it’s a high-risk business because the sector has a default rate of 50%. Making it very likely that any loans they issue to that business would result in a loss.

So If the bank decides to issue a loan or business credit card to a trucking business the bank may raise its interest rate accordingly to account for the additional risk. Otherwise, they may choose to decline the application altogether. 

Can You Have More Than One Primary NAICS Code?

There’s only one NAICS code that’s assigned and maintained by the US Census Bureau for each establishment. It’s based on the primary activity of the business. Other federal agencies may assign additional NAICS codes to a business for their own needs. 

The best example of this is the System for Award Management (SAM) where companies can register for federal contractor positions. In this system, one establishment may have five to ten NAICS codes associated with it. Each agency has its own policy regarding classification codes. 

Each company can only have one primary NAICS code, but certain federal agencies allow multiple secondary codes if the business offers other products or services. 

Can You Change Your NAICS Code?

Let’s say that after reading all of this, you have a sudden urge to check your NAICS code. You take a look at your tax documents and notice that the code listed is wrong! Your business has code for a travel agency but in reality, you’re a marketing writer who specializes in travel. 

If you have the wrong code listed on your business credit reports, contact the business credit bureau that’s reporting the incorrect information to have it corrected. Review your D&B, Equifax, and Experian business credit reports ensuring the right information is shown on each. 

If the wrong code is listed under a government agency, it’s best to contact the reporting agency to have the code changed. 

Build Your Business Credit

Whether your business is considered low-risk or high-risk, you’ll still need to have good business credit to qualify for a business credit card or loan. Even if you’re a small business owner in a low-risk industry you’ll still face difficulty finding financing with bad credit history. 

The best way to get the financing you need is to build business credit. Presenting lenders with a good business credit score and a good personal credit score lowers your credit risk. This gets you the best interest rates, higher credit limits, and the best repayment terms. 

An affordable way to build your business credit is by opening a Credit Strong business credit-builder account. A business credit builder helps your business establish a solid payment history with an account that acts as a savings account and installment loan combined. 

Just pick the plan that works for your business and get started building business credit. No credit check is required. 

Don’t postpone the financing your business needs because of a thin business credit file. Start building business credit with Credit Strong today!

Final Thoughts

Overall, the NAICS code might seem inconsequential but it could make the difference between getting approved for a business loan at a reasonable interest rate and getting denied entirely. 

The risk associated with each industry informs decisions made by banks and insurance companies. The risk level is an important factor in qualifying for funding. However, creditworthiness, profitability, and longevity are just as important.

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