by Alexandru Tanase Nov 25, 2022Share On:
What are SIC Codes, and in what way can they result in a denial of business funding? Ever wonder which SIC codes prevent you from getting a job? We have the answers you're looking for, so stop wondering. But before we continue, what exactly is a SIC code?
The U.S. government assigns businesses a four-digit numerical code called a Standard Industry Classification code (SIC) to help identify their main line of business activities. A system for classifying businesses includes the SIC Code (Standard Industrial Classification). It reveals the type of business a corporation is actively into. The Securities and Exchange Commission discovered it. For instance, your company's SIC code would be 3011 if it manufactures inner tubes of tires. The numbers are somewhat intelligent because some industry groupings correspond to some ranges of the first four digits. For example, manufacturing relates to four-digit SIC codes that either start with a two or three.
The first and second digits then determine the primary industry group. Here we will use 30 in our case to denote "Rubber and Miscellaneous Plastic Products." Consequently, this raises the following query: How many SIC codes are there?
Industry codes with lower risk include:
You could be wondering where you would find the SIC codes?" There is a list of SIC codes. To specify the industry and industrial group, the digits of the SIC code are classified. The SIC code's first three digits represent the primary industry group, the third digit represents the industry group, and the fourth digit designates the industry.
The Internal Revenue Service will utilize the SIC code you choose. It will help you decide whether your company's tax returns are comparable to those of other companies in your industry. Therefore, your company can be averted if your tax deductions differ from those of your field companies. In addition, certain businesses could be classified as high-risk if they choose the incorrect SIC code for their industry. However, you can select the proper code on your first try if you comprehend how the business classification system operates.
Another company categorization code is the North American Industry Classification System (NAICS). While gathering, analyzing, and publishing statistical data about the American economy, this code groups some public establishments. Based on the primary activities that an organization engages in, NAICS industry codes characterize it. The NAICS publishes a list of high-risk and high-profit industries on its own. Casinos, pawn shops, liquor stores, and car dealerships are among the list's higher-risk professions. The NAICS does not differentiate between online and offline or hybrid enterprises in an industry, which is one of the most significant disparities between the two systems.
These coding schemes resemble one another but are different. Both of them are. However, NAICS will gradually replace the SIC code system as it is being steadily left. But for the time being, presume they are both active while the changeover is still ongoing.
But which SIC codes exclude you?
Both NAICS and SIC are used by lenders, insurance providers, and business credit reporting agencies to evaluate whether your company falls under a high-risk industry categorization. This means that depending on your business categorization can lead to rejecting a loan for a startup business or a business credit card.
Some SIC codes may result in your company receiving automatic rejections, paying higher premiums, and leading to a reduction in credit limit, making obtaining business financing more difficult.
Risk has to be a significant concern when evaluating any part of a firm. Every industry has inherent problems. Crops fail, or lease conditions increase too much, forcing an enterprise to relocate. Or imports become less dependable due to tariffs or even a conflict.
Risk is essential in many ways, but funding is the main one. Lending banks are reluctant to carry out activities in several sectors. There are tighter underwriting requirements in such specific situations. But an establishment can at least receive finance.
Unlike other industries, though. There may be no funding at all for some sectors. These companies will consequently need alternative funding sources or a personal funding program. This includes crowdsourcing, angel investors, venture money, business credit development, and others. Many companies would still prefer to engage with lenders. But where do lenders get their estimates of how much danger there is?
The SIC codes are explained in an article released by the center for disease control in 1999 about a report on dangers in small enterprises. Additionally, it provides details on injuries linked to the codes. Even though this is not the actual method most lending institutions use to assess risk, it is nonetheless interesting. Additionally, it shows what might be motivating some of the arguments. Workplace injuries factor into the risk calculation in part. These are the kinds of things the CDC report mentioned. However, careers that involve a lot of monetary transactions are the other side of the risk coin.
After all, there may not be much of a risk of injury in a pawn store. But because they are usually linked with large sums of money, they might be an enticing target for criminals. Thus, just like US SIC codes for other industries, the retail SIC codes can carry a high level of risk.
"What is a SIC Code for Businesses?" You are free to select any SIC code. For instance, you will choose 5511, "Motor Vehicle Dealers (New and Used)," while searching for automotive sales. However, because of the high-risk aspect in the name of the business categorization, the majority of lenders would automatically reject your company. You want to be truthful when SIC is coding your establishment or business. However, it's good if more than one SIC code is utilized. There is nothing wrong with selecting the SIC code that won't cause lenders to reject you.
One of the low-risk industries for business credit might be your auto sales firm! As a result, you must create a unique business code to start a car sales company. It should be one where the actual company code specifically mentions car washes, auto and home supply stores, and motor vehicle parts and accessories. This way, you can continue to process your actual "automotive sales" firm without being viewed as a risk concern.
Nothing about doing this is dishonest. If the code applies, switching high-risk SIC codes for lower-risk codes is acceptable. And it might increase the findability of your company. For more details about these codes, consult the database of SIC codes.
It goes beyond coming up with the proper memorable name that is simple to speak and spell and invokes the goal statement of your organization. Because the danger is also a factor, rejection in financing will result from including a risky business type in your company name. Here, it helps to know which SIC codes will get you turned down. For example, check cashing services, bail bonds, and various financing company models are being regulated. Hence, you named your company Chico's Bail Bonds will almost certainly cause a delay, if not a flat-out denial. But when two apply, it works the same way as picking a lower-risk SIC code. Using the name Chico' is not misleading, prohibited, or immoral.
Will your company idea receive finance under this more inclusive name? It won't, of course. However, you will be accepted after you can provide a finance case. Of course, having nor3 more substantial business credit will help you pitch for investment even more persuasively.
By selecting the incorrect SIC codes, you made a modest but potentially costly mistake for your company. By choosing the improper SIC codes, you run the risk of hurting your company's reputation and being classified as high-risk. And this may directly affect your insurance costs, your capacity to finance, and even the suggestions made for your credit limit. Therefore, do your homework before choosing any SIC codes for your company.
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