What are the Industries and Businesses Categorized as High-Risk? Understand the Implications if Your Business is Included in the List
by Amanda Bailey Jun 05, 2023
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- Introduction
- What is a High-Risk Industry or Business?
- Why are Some Industries or Businesses Classified as High-Risk?
- What is the NAICS Codes for High-Risk Industries or Businesses?
- Implications of Being Categorized as High-Risk
- Conclusion
- FAQs
When starting a new business or industry, it's essential to understand the risks involved. Some industries or businesses are classified as high-risk due to the nature of their operations or the potential for fraudulent activities. Being classified as high-risk can significantly impact a business, including difficulty in obtaining funding and increased regulatory oversight. In this article, we'll explore what industries and businesses are categorized as high-risk and the implications of being included in this list.
1. Introduction
Starting and running a business involves many risks. One of the most important things to consider when starting a business is the classification of your industry or business. Some industries or businesses are classified as high-risk due to the potential for fraudulent activities or the nature of their operations. Being classified as high-risk can significantly impact a business, including difficulty in obtaining funding and increased regulatory oversight. In this article, we'll explore what industries and businesses are categorized as high-risk and the implications of being included in this list.
2. What is a High-Risk Industry or Business?
2.1 Definition of High-Risk Industry or Business
A high-risk industry or business has a higher potential for fraudulent activities, chargebacks, or disputes. These businesses typically have a higher risk of financial loss for payment processors, banks, and other financial institutions. High-risk businesses include online gambling, adult entertainment, and debt collection agencies.
2.2 Examples of High-Risk Industries or Businesses
High-risk industries or businesses include:
- Online gambling
- Adult entertainment
- Debt collection agencies
- Nutraceuticals
- Travel agencies
- Firearms dealers
- CBD and marijuana dispensaries
- Tech support services
- Virtual currencies
- E-commerce
2.3 Factors that Determine if a Business is High-Risk
Several factors determine if a business is classified as high-risk, including potential fraudulent activities, chargebacks, and disputes. Businesses operating in a highly regulated industry, such as the financial or healthcare industry, are also considered high-risk. Other factors determining a high-risk business include the business model, location, and financial stability.
3. Why are Some Industries or Businesses Classified as High-Risk?
3.1 Reasons for Classification as High-Risk
Some industries or businesses are classified as high-risk due to the nature of their operations or the potential for fraudulent activities. High-risk industries or businesses typically have a higher risk of financial loss for payment processors, banks, and other financial institutions. The potential for fraudulent activities
is also a significant concern, as it can result in chargebacks and disputes that can negatively impact the reputation of the business and its ability to obtain funding.
3.2 Legal Implications of Being Classified as High-Risk
Being classified as high-risk can have legal implications for a business. High-risk businesses may be subject to increased regulatory oversight, including compliance with other laws and regulations. For example, businesses in the financial industry that are classified as high-risk may be subject to the Bank Secrecy Act and anti-money laundering regulations.
4. What is the NAICS Codes for High-Risk Industries or Businesses?
4.1 Understanding NAICS Codes
The government uses the North American Industry Classification System (NAICS) to categorize businesses into different industries based on their primary activities. Banks and financial institutions use NAICS codes to evaluate the risk of a business and determine if it is classified as high-risk.
4.2 High-Risk NAICS Codes
High risk NAICS codes that are considered high-risk include:
- 454111: Electronic Shopping and Mail-Order Houses
- 454112: Electronic Auctions
- 541511: Custom Computer Programming Services
- 561440: Collection Agencies
- 561621: Security Systems Services
4.3 Best NAICS Codes for Funding
The best NAICS codes for funding that are considered low-risk and have the best chance of obtaining funding include the following:
- 541712: Research and Development in the Physical, Engineering, and Life Sciences
- 621210: Offices of Dentists
- 621320: Offices of Optometrists
- 621498: All Other Outpatient Care Centers
- 722511: Full-Service Restaurants
4.4 Low-Risk Business NAICS Codes
The low risk business NAICS codes that are considered low-risk and have the lowest potential for fraudulent activities include:
- 541940: Veterinary Services
- 621111: Offices of Physicians (except Mental Health Specialists)
- 621399: Offices of All Other Miscellaneous Health Practitioners
- 722513: Limited-Service Restaurants
- 812112: Beauty Salons
5. Implications of Being Categorized as High-Risk
5.1 Difficulty Obtaining Funding
One of the most significant implications of being categorized as high-risk is the difficulty in obtaining funding. Banks and financial institutions are hesitant to lend to businesses that are considered high-risk due to the potential for financial loss.
5.2 Increased Regulatory Oversight
Classifying high-risk can increase regulatory oversight, including compliance with other laws and regulations. This can increase the cost of doing business and make it more difficult for the business to operate.
5.3 Higher Insurance Premiums
High-risk businesses may also face higher insurance premiums due to the increased risk of claims and lawsuits. Insurance companies may charge higher premiums to offset the potential cost of claims and protect their bottom line.
5.4 Difficulty in Finding Payment Processors
High-risk businesses may also need help finding payment processors. Payment processors may hesitate to work with high-risk businesses due to the potential for fraudulent activities and chargebacks.
6. Conclusion
Understanding the implications of being categorized as high-risk is essential for businesses. Being classified as high-risk can significantly impact a business, including difficulty in obtaining funding and increased regulatory oversight. It's important to be aware of the NAICS codes for high-risk industries and businesses and to take steps to mitigate risk.
7. FAQs
FAQ #1: What are the NAICS codes for high-risk industries or businesses?
NAICS codes that are considered high-risk include electronic shopping and mail-order houses, electronic auctions, custom computer programming services, collection agencies, and security systems services. These industries typically have a higher potential for chargebacks, disputes, and fraudulent activities.
FAQ #2: What are the best NAICS codes for funding?
NAICS codes considered low-risk and have the best chance of obtaining funding include research and development in the physical, engineering, and life sciences, offices of dentists and optometrists, all other outpatient care centers, and full-service restaurants. These industries typically have a lower potential for chargebacks, disputes, and fraudulent activities.
FAQ #3: What are low-risk business NAICS codes?
NAICS codes considered low-risk and have the lowest potential for fraudulent activities include veterinary services, offices of physicians (except mental health specialists), offices of all other miscellaneous health practitioners, limited-service restaurants, and beauty salons. These industries typically have a lower potential for chargebacks, disputes, and fraudulent activities.
FAQ #4: What can high-risk businesses do to mitigate risk?
High-risk businesses can take steps to mitigate risk, including implementing fraud prevention measures, maintaining accurate financial records, and seeking out payment processors that specialize in working with high-risk businesses. Knowing the regulations and laws that apply to high-risk industries and businesses is also important.
FAQ #5: Can a high-risk business become low-risk?
Yes, a high-risk business can take steps to become low-risk. Implementing fraud prevention measures, maintaining accurate financial records, and demonstrating a consistent track record of responsible business practices can help a high-risk business become more attractive to banks, financial institutions, and payment processors. It's important to work with knowledgeable professionals who can guide you in mitigating risk and improving the business's financial health.
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