One of the most important components of a business credit model is the industry your business finds itself in. Lenders will factor this into their risk assessment because certain lines of business are just considered to have different levels of systemic risk than others. Whether you agree with this framing or not is irrelevant – this is what you must understand if you want to improve your business credit score.
The industry mnemonic that matters here is the NAICS code and in this post, we’re going to discuss why it’s so important to be on top of this for your business.
What is a NAICS Code?
A NAICS code is a six-digit number that is used to categorize companies into their industry sectors and subsectors. For example, a computer training company will have a NAICS code of 611420 – and this will give the IRS and other lenders information about the type of business that is being operated. Each industry has its own code and they are always being updated to reflect the current state of the economic ecosystem.
Why Does It Matter?
Your NAICS code matters for your business credit score because it applies various industry-specific risks to your applications, independent of your specific business. Lenders have opinions on which industries are riskier than others and your NAICS code places you into a specific bucket with implications for the financing that you will be offered.
If you are placed in a risky industry, your credit score is going to be negatively impacted and the cost of borrowing will increase as a result. Thus, it’s crucially important that you identify the correct NAICS code for your business so that you aren’t hamstrung by credit risk that doesn’t actually apply to you.
Take Back the Reins
It’s important to note that sometimes credit bureaus and financiers will make their own determination for your NAICS code and that can negatively affect you if it is done incorrectly. The onus is on you to determine the accurate code for your purposes and then to use that consistently whenever you apply for financing of any sort. Take your time to search through the various options and find the one that best fits the business you are running. Then volunteer that upfront whenever you’re dealing with a financial institution so that they record it correctly on their system.
It’s also important to monitor this regularly as sometimes your credit profile will pick up multiple codes over time as institutions deal with your business. Proactively check that you’re only being marked with the one correct NAICS code so that you aren’t misjudged for industry codes that don’t represent your business.
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We hope this brief guide to NAICS codes shows you how a small administrative detail can have a meaningful difference on your credit score and thus the financing you’re able to access. Get on top of this early and you’ll be glad you did.
If you want to dive deeper into this and other business credit principles, be sure to get in touch, and let’s see where we can help you to get your business credit into tip-top shape!