Understanding industry types
As an owner of a Small and Medium-sized Business (SMB), navigating the complex world of commercial financing can be a daunting task. One key aspect that significantly influences the process is understanding the different industry types and their relevance to lenders. This blog post aims to shed light on industry classification, particularly focusing on NAICS codes, and how this information matters to lenders.
What are NAICS Codes?
NAICS, or the North American Industry Classification System, is a standard used by federal statistical agencies in classifying business establishments. These codes are essential because they provide a systematic way to categorize businesses into industries based on their primary business activity. Each NAICS code is a six-digit number that represents a specific industry, with the level of detail increasing with each digit.
Examples of industry types
Retail (NAICS Code: 44-45): This includes businesses involved in selling merchandise, such as clothing stores, supermarkets, and car dealerships.
Manufacturing (NAICS Code: 31-33): This sector comprises establishments engaged in the mechanical, physical, or chemical transformation of materials, substances, or components into new products.
Subclasses within industries
Each broad industry category, like retail or manufacturing, is further divided into subclasses. For example, within manufacturing, there are subclasses for food manufacturing, apparel manufacturing, and more. These subclasses provide a more detailed insight into the specific nature of a business’s operations.
Determining your SMB's industry type
Understanding your Small and Medium-sized Business's (SMB) industry type is not just a formality but a crucial step in navigating the commercial financing landscape. Here's how you can figure out your business's industry type:
Analyze your primary business activity: The first step is to closely analyze what your business primarily does. Ask yourself: What is the main service or product I offer? This understanding will guide you towards identifying your industry sector.
Consult the NAICS website: The North American Industry Classification System (NAICS) website is a valuable resource. By searching with keywords related to your business activities, you can find the most appropriate NAICS code that matches your business. The website offers a searchable database where you can input descriptions of your business to find corresponding codes.
Check with industry associations: Many industry associations use NAICS codes to classify their members. If you are a member of any industry-specific association, they can help you determine your correct industry classification.
Look at similar businesses: Researching how similar businesses are classified can provide insights. Websites of competitors or similar businesses often mention their NAICS code, especially if they are involved in government contracts or specialized industries.
Review your business license or permit: Sometimes, your business license or permit can also indicate your industry type. Local government agencies often use industry classifications similar to NAICS codes when issuing business licenses.
Determining your SMB's industry type is a foundational step in preparing for commercial financing. It not only aids in understanding how lenders view your business but also helps in aligning your business strategies with industry-specific trends and demands. Take the time to accurately identify your industry type to streamline your financing journey and strengthen your business's financial positioning.
Why lenders care about industry types
Risk assessment: Different industries have varying risk profiles. For example, a technology company might be considered more volatile compared to a utility company. Lenders use industry classification to assess the level of risk associated with financing a business.
Economic trends and performance: Certain industries are more sensitive to economic cycles. Understanding the industry helps lenders predict the potential impact of economic downturns or booms on a business’s performance.
Regulatory environment: Some industries, like healthcare or financial services, are heavily regulated. Lenders need to understand the regulatory challenges a business might face in these industries.
Historical data: Lenders use historical data from specific industries to predict future performance and viability of businesses within those sectors.
Final thoughts
For SMB owners seeking commercial financing, understanding the importance of industry classification and NAICS codes is crucial. This knowledge not only helps in accurately representing your business to potential lenders but also provides insights into how lenders view and assess the risk associated with your industry. By being aware of these dynamics, SMB owners can better prepare and position themselves for successful financing outcomes.