the North American Industry Classification System (NAICS) codes are used to classify business establishments based on the type of economic activity they are engaged in. NAICS is used by business and government to classify and measure economic activity in Canada, Mexico, and the United States. It is designed to facilitate the collection, analysis, and publication of statistical data related to the business economy.
Each NAICS code is a six-digit number, with the first two digits representing the economic sector, the third digit representing the subsector, the fourth digit representing the industry group, the fifth digit representing the NAICS industry, and the sixth digit representing the national industry.
Keep in mind that every few years, the NAICS is reviewed, and some codes may be updated, added, or deleted to reflect changes in the economy.
If you register your business in a high-risk industry, it can cause all sorts of problems down the road:
But, how exactly can you chase your vision and ensure the money follows in a high-risk industry, never able to break even with no access to funding (and paying out your ears in insurance)? — That’s where understanding low-risk NAICS codes and best SIC codes for business credit comes into play.
Let’s take a look at the key differences between NAICS codes and SIC codes.
First, the structure and scope vary. NAICS codes get a bit more detailed with their five to six-digit codes — this provides a more specific breakdown of industries. On the other hand, SIC codes keep it simple with three to four-digit numbers, offering less granularity in industry categories.
Next, their adoption and age differ. NAICS codes are the cool kids on the block, introduced in 1997 as a modern and flexible system. They all but replaced the old-timer SIC codes from the 1930s. NAICS codes are widely used these days. Meanwhile, SIC codes are still kicking around in some older databases (and history books).
Furthermore, there are compatibility differences. NAICS codes like to play nice with international standards — this makes it easier to compare and analyze industries worldwide. SIC codes, on the other hand, are more focused on the home turf, primarily used within the U.S., and not always a match with international systems.
Finally, industry coverage deviates between systems. NAICS codes have a wider embrace, covering a broader range of industries to keep up with the modern business landscape. SIC codes, bless their old souls, might not have codes for some of the newer industry segments. NAICS codes are the more with-it choice if you want a comprehensive classification system.
In sum, NAICS codes are a fresh, versatile system, perfect for keeping up with the times and playing well with others. However, if you’re dealing with older databases, SIC codes can still be useful.
Even though they have been replaced by NAICS, government agencies and some funding companies continue to use SIC codes to classify companies based on their business activity.
Note: unless you’re a contractor for the government, you’re not required to enter a NAICS code when you register your business. However, you will need it when you file your taxes with the IRS.
NAICS codes are used to collect and analyze statistical data, facilitate comparability of data across countries, and assign businesses to specific industry categories.
The NAICS system is hierarchical and organized into sectors, sub-sectors, industry groups, industries, and national industries. At the most detailed level, there are six-digit NAICS codes. As of my knowledge cutoff in September 2021, there are over 1,000 six-digit NAICS codes covering a wide range of industries and business activities.
To select the appropriate NAICS code for your business, consider the primary activities and functions of your company. Start by identifying the core aspects of your business and the industry in which it operates. Then, find the code that best aligns with your business activities. You should select a code that accurately describes the primary nature of your business operations.
When applying for business credit, lenders consider the level of risk associated with the industry in which the business operates. Low-risk NAICS codes are less prone to economic volatility and have historically demonstrated stability. Having a low-risk NAICS code can positively influence lenders’ perception of your business, potentially increasing your chances of obtaining credit or better loan terms.
Let’s look at some examples of low-risk NAICS codes for different industries:
For comparison purposes, let’s peek at high-risk NAICS codes.
Economic volatility, regulatory challenges, technological disruption, and environmental or safety hazards can contribute to the risk of certain NAICS codes.
Now, here are some examples of NAICS codes that can be considered high-risk:
Next, learn how choosing the right codes can impact your potential business funding.
The industries that get the most funding seem to vary greatly based on the type of funding.
For example, Kingscrowd — a sort of crowdfunding platform where venture capitalists and businesses can connect for investment opportunities — reported their top five industries for funding in 2020 as the following:
Now, the SBA doesn’t allow some businesses to apply for funding through their programs — These include certain real estate investment firms, dealers of rare coins and stamps, banks and insurance companies, pyramid sales plans, businesses involved in illegal activities or gambling as the principal focus, non-profits, government-owned corporations, consumer and marketing cooperatives, and churches and organizations with religious objectives.
While some real estate investment firms can’t get SBA funding, $270 billion in SBA funds were allocated to commercial real estate in 2020. So, a lot of money is also poured into real estate.
And, Crunchbase reported the six industries with the highest growth potential in 2020 in a completely separate arena than other sources:
Now, let’s look at how NAICS codes can affect business funding odds.
First, many funding programs, grants, and loans are specifically designed for businesses in certain industries or sectors. By correctly identifying your NAICS code, you can narrow down your search for funding opportunities that are tailored to your industry, increasing your chance to find relevant funding sources.
Next, funding programs often have specific eligibility criteria based on NAICS codes. Certain programs may prioritize or exclusively support businesses in particular industries. By accurately aligning your NAICS code with your business activities, you ensure that you meet the eligibility requirements for relevant funding programs.
Furthermore, funding institutions or investors may prefer to support businesses within industries they are familiar with or have expertise in. By selecting the right NAICS code, you can better attract the attention of funders who specialize in or have a keen interest in your industry, potentially increasing their confidence in your business and improving your chances of securing funding.
Funding opportunities can vary depending on numerous factors, including economic conditions and specific funding initiatives.
Here are a couple of examples of NAICS codes that have historically shown higher funding potential or are commonly associated with industries that receive funding support:
Let’s not forget to look at SIC codes — many lenders still rely on them.
SIC codes were last updated in 1987 and can provide insights into a business’s operations, industry risks, and historical performance (yes, even today) — These are all relevant factors to assess creditworthiness.
As with NAICS codes, to choose the best SIC code for your business, you should always do your research. Consider the primary activities and functions of your business and select an SIC code that accurately represents the industry in which your business operates.
The best SIC code is the one that aligns closely with your business activities and industry classification and is considered low-risk by the lender you’re targeting.
With that said, here are a few SIC codes that are generally considered to have lower-risk profiles:
Each NAICS code is a six-digit number, with the first two digits representing the economic sector, the third digit representing the subsector, the fourth digit representing the industry group, the fifth digit representing the NAICS industry, and the sixth digit representing the national industry.
Here's a breakdown of the digits:
- First Two Digits: Economic Sector
- Third Digit: Subsector
- Fourth Digit: Industry Group
- Fifth Digit: NAICS Industry
- Sixth Digit: Country-specific (National Industry)
Example
- 11Agriculture, Forestry, Fishing and Hunting
- 111Crop Production
- 1111Oilseed and Grain Farming
- 11111Soybean Farming
- 111110 Soybean Farming (U.S. specific)
- 11111Soybean Farming
- 1111Oilseed and Grain Farming
- 111Crop Production
Purpose
NAICS codes are crucial for various purposes, including:- Regulatory Compliance: Many government regulations and programs are based on NAICS codes.
- Market Research: Businesses use NAICS codes to identify customers and competitors and to understand market conditions.
- Economic Analysis: Analysts use NAICS codes to study economic activities and trends.
How to Find a NAICS Code
To find the NAICS code for a particular business or industry, you can use the NAICS search tool available on the official U.S. Census Bureau NAICS webpage.Keep in mind that every few years, the NAICS is reviewed, and some codes may be updated, added, or deleted to reflect changes in the economy.
If you register your business in a high-risk industry, it can cause all sorts of problems down the road:
- Limited access to credit and funding
- Higher insurance costs
- Increased regulatory scrutiny
- Difficulty attracting investments
- Challenges building partnerships
But, how exactly can you chase your vision and ensure the money follows in a high-risk industry, never able to break even with no access to funding (and paying out your ears in insurance)? — That’s where understanding low-risk NAICS codes and best SIC codes for business credit comes into play.
- NAICS Codes vs. SIC Codes: A Comparison
- Understanding NAICS Codes
- Identifying High-Risk NAICS Codes
- What Industries Get the Most Funding?
- How to Choose the Best NAICS Codes for Funding
- What NAICS Codes Get the Most Funding?
- Exploring SIC Codes for Business Credit
NAICS Codes vs. SIC Codes: A Comparison
Let’s take a look at the key differences between NAICS codes and SIC codes.
First, the structure and scope vary. NAICS codes get a bit more detailed with their five to six-digit codes — this provides a more specific breakdown of industries. On the other hand, SIC codes keep it simple with three to four-digit numbers, offering less granularity in industry categories.
Next, their adoption and age differ. NAICS codes are the cool kids on the block, introduced in 1997 as a modern and flexible system. They all but replaced the old-timer SIC codes from the 1930s. NAICS codes are widely used these days. Meanwhile, SIC codes are still kicking around in some older databases (and history books).
Furthermore, there are compatibility differences. NAICS codes like to play nice with international standards — this makes it easier to compare and analyze industries worldwide. SIC codes, on the other hand, are more focused on the home turf, primarily used within the U.S., and not always a match with international systems.
Finally, industry coverage deviates between systems. NAICS codes have a wider embrace, covering a broader range of industries to keep up with the modern business landscape. SIC codes, bless their old souls, might not have codes for some of the newer industry segments. NAICS codes are the more with-it choice if you want a comprehensive classification system.
In sum, NAICS codes are a fresh, versatile system, perfect for keeping up with the times and playing well with others. However, if you’re dealing with older databases, SIC codes can still be useful.
Even though they have been replaced by NAICS, government agencies and some funding companies continue to use SIC codes to classify companies based on their business activity.
Note: unless you’re a contractor for the government, you’re not required to enter a NAICS code when you register your business. However, you will need it when you file your taxes with the IRS.
Understanding NAICS Codes
As previously mentioned, NAICS stands for the North American Industry Classification System. It was developed by the statistical agencies of the United States, Canada, and Mexico to classify businesses and industries.NAICS codes are used to collect and analyze statistical data, facilitate comparability of data across countries, and assign businesses to specific industry categories.
The NAICS system is hierarchical and organized into sectors, sub-sectors, industry groups, industries, and national industries. At the most detailed level, there are six-digit NAICS codes. As of my knowledge cutoff in September 2021, there are over 1,000 six-digit NAICS codes covering a wide range of industries and business activities.
To select the appropriate NAICS code for your business, consider the primary activities and functions of your company. Start by identifying the core aspects of your business and the industry in which it operates. Then, find the code that best aligns with your business activities. You should select a code that accurately describes the primary nature of your business operations.
When applying for business credit, lenders consider the level of risk associated with the industry in which the business operates. Low-risk NAICS codes are less prone to economic volatility and have historically demonstrated stability. Having a low-risk NAICS code can positively influence lenders’ perception of your business, potentially increasing your chances of obtaining credit or better loan terms.
Let’s look at some examples of low-risk NAICS codes for different industries:
- Real estate:
- 531110 – Lessors of Residential Buildings and Dwellings
- 531120 – Lessors of Nonresidential Buildings (except mini warehouses)
- 531190 – Lessors of Other Real Estate Property
- Online retail:
- 454110 – Electronic Shopping and Mail-Order Houses
- 454210 – Vending Machine Operators
- 454310 – Fuel Dealers
- Consulting:
- 541611 – Administrative Management and General Management Consulting Services
- 541612 – Human Resources Consulting Services
- 541618 – Other Management Consulting Services
For comparison purposes, let’s peek at high-risk NAICS codes.
Identifying High-Risk NAICS Codes
Certain NAICS codes are considered “high risk” due to various factors that impact business stability and profitability.Economic volatility, regulatory challenges, technological disruption, and environmental or safety hazards can contribute to the risk of certain NAICS codes.
Now, here are some examples of NAICS codes that can be considered high-risk:
- Construction and Extraction:
- 238910 – Site Preparation Contractors
- 213112 – Support Activities for Oil and Gas Operations
- 238990 – All Other Specialty Trade Contractors
- Accommodation and Food Services:
- 721110 – Hotels (except Casino Hotels) and Motels
- 722310 – Food Service Contractors
- 722511 – Full-Service Restaurants
Next, learn how choosing the right codes can impact your potential business funding.
What Industries Get the Most Funding?
The industries that get the most funding seem to vary greatly based on the type of funding.
For example, Kingscrowd — a sort of crowdfunding platform where venture capitalists and businesses can connect for investment opportunities — reported their top five industries for funding in 2020 as the following:
- Alcohol, tobacco, and recreational drugs
- Food, beverage, and restaurants
- Consumer products, goods, and services
- Media, entertainment, and publishing
- Transportation, automotive, aviation, and aerospace
- Full-service restaurants
- Limited-service restaurants
- Offices and dentists
- General freight trucking
- Hotels and motels
Now, the SBA doesn’t allow some businesses to apply for funding through their programs — These include certain real estate investment firms, dealers of rare coins and stamps, banks and insurance companies, pyramid sales plans, businesses involved in illegal activities or gambling as the principal focus, non-profits, government-owned corporations, consumer and marketing cooperatives, and churches and organizations with religious objectives.
While some real estate investment firms can’t get SBA funding, $270 billion in SBA funds were allocated to commercial real estate in 2020. So, a lot of money is also poured into real estate.
And, Crunchbase reported the six industries with the highest growth potential in 2020 in a completely separate arena than other sources:
- Med/biotech
- Payments
- Cybersecurity
- Telehealth
- Remote meeting/collaboration
- Edtech
Now, let’s look at how NAICS codes can affect business funding odds.
How to Choose the Best NAICS Codes for Funding
Selecting the right NAICS codes can improve your chances of securing funding.First, many funding programs, grants, and loans are specifically designed for businesses in certain industries or sectors. By correctly identifying your NAICS code, you can narrow down your search for funding opportunities that are tailored to your industry, increasing your chance to find relevant funding sources.
Next, funding programs often have specific eligibility criteria based on NAICS codes. Certain programs may prioritize or exclusively support businesses in particular industries. By accurately aligning your NAICS code with your business activities, you ensure that you meet the eligibility requirements for relevant funding programs.
Furthermore, funding institutions or investors may prefer to support businesses within industries they are familiar with or have expertise in. By selecting the right NAICS code, you can better attract the attention of funders who specialize in or have a keen interest in your industry, potentially increasing their confidence in your business and improving your chances of securing funding.
Funding opportunities can vary depending on numerous factors, including economic conditions and specific funding initiatives.
Here are a couple of examples of NAICS codes that have historically shown higher funding potential or are commonly associated with industries that receive funding support:
- Information Technology:
- 541511 – Custom Computer Programming Services
- 541512 – Computer Systems Design Services
- 518210 – Data Processing, Hosting, and Related Services
- Healthcare and Biotechnology:
- 621111 – Offices of Physicians
- 621610 – Home Healthcare Services
- 325414 – Biological Product (except Diagnostic) Manufacturing
What NAICS Codes Get the Most Funding?
According to the U.S. Department of Treasury’s Guide for Small, Minority-Owned, and Women-Owned Businesses, these are some of the NAICS codes that receive significant funding:- 541519 – Other Computer Related Services
- 541512 – Computer Systems Design Services
- 322121 – Paper (Except Newsprint) Mills
- 517110 – Wired Telecommunications Carriers
- 511210 – Software Publishers
- 334111 – Electronic Computer Manufacturing
- 541611 – Administrative Management and General Management Consulting Services
- 541511 – Custom Computer Programming Services
- 561720 – Janitorial Services
- 561210 – Facilities Support Services
Let’s not forget to look at SIC codes — many lenders still rely on them.
Exploring SIC Codes for Business Credit
SIC codes, or Standard Industrial Classification codes, were primarily used before NAICS codes to classify businesses based on their industry and activities. The US government developed them to collect, analyze, and compare data across industries.SIC codes were last updated in 1987 and can provide insights into a business’s operations, industry risks, and historical performance (yes, even today) — These are all relevant factors to assess creditworthiness.
As with NAICS codes, to choose the best SIC code for your business, you should always do your research. Consider the primary activities and functions of your business and select an SIC code that accurately represents the industry in which your business operates.
The best SIC code is the one that aligns closely with your business activities and industry classification and is considered low-risk by the lender you’re targeting.
With that said, here are a few SIC codes that are generally considered to have lower-risk profiles:
- Real estate:
- SIC 6512 – Operators of Nonresidential Buildings
- SIC 6531 – Real Estate Agents and Managers
- Online retail:
- SIC 5961 – Catalog and Mail-Order Houses
- SIC 5941 – Sporting Goods Stores
- General business:
- SIC 8741 – Management Services
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