SIC is an acronym for Standard Industrial Classification. SIC codes are the standardized numbering system developed by the federal government that classifies business establishments according to the industries they belong to. Using SIC codes is particularly helpful when you’re looking to segment markets, analyze customer relationships, and conduct general business research. SIC codes divide all major economic activity into ten major divisions. Businesses are then further classified within each division. The first two digits represent the company’s major industry affiliation and its subdivision. The remaining digits break down the divisions into specific activities and sub-industries. If your business shows two SIC codes, the first SIC code listed in the company’s primary line of business, with others compromising at least 10 percent of the company’s revenue.

NAICS is an acronym for The North American Industry Classification System. This system was introduced in 1997 as a replacement for SIC codes and now serves as the standard for the three NAFTA countries of Mexico, Canada, and the United States. NAICS offers classifications that more closely reflect the many new industries that have re-shaped the U.S. and global economy. NAICS differs from SIC in that it focuses on business processes rather than end products. It also captures many service industries currently under-represented in the SIC system. While SIC codes are still widely used, the federal government will no longer support and maintain this system.

Because certain SIC or NAICS codes are considered high-risk, it is important that your company’s profile has the correct SIC or NAICS code. Lenders, suppliers, and customers may decide not to conduct business with a company that lists a high-risk SIC or NAISC code or has a SIC or NAISC code that clearly doesn’t match the business’s operations or products and services portrayed.

Lenders, banks, insurance companies and business credit reporting agencies use the two business classification systems to determine if your business is a high-risk industry classification. This means that you could get a denial for a loan or a business credit card. And it would be based on your business classification. Some SIC codes can trigger automatic turndowns, higher premiums, and reduced credit limits for your business.

In 1999, the Centers for Disease Control published an article on risks in small businesses. This article contains information on SIC codes and gives information on injuries associated with the codes. While this is not the true means by which lending institutions decide on risk, it is still of interest and can demonstrate what may be behind some of the reasoning.

Part of the calculus of risk comes from occupational injuries such as those noted in the CDC report. But the other side of the risk coin is occupations which are high in cash transactions. After all, a pawn shop might not have much of a specific risk of injury at all. But the large amounts of cash normally associated with one mean that it is a tempting target for thieves.

The choice of SIC code is yours. For automotive sales, for example, you would normally select 5511, ‘Motor Vehicle Dealers (New and Used)’. However, most lenders will automatically turn your business down. This is because of the high-risk factor within the business classification name. Naturally, you want to be honest with your SIC coding classification. But if more than one SIC code could apply, that is okay. There is nothing wrong with choosing the SIC code which will not get you denied by lenders. We like SIC code 8741, Management Services or SIC Code 8742 which is Management Consulting Services for our clients. They are generic, lender friendly, and can be applied to almost any business.

Therefore, if you want to have your automobile sales company, you need to develop a business code which has auto and home supply stores. And it needs to have motor vehicle parts and accessories, or car washes written in the actual business code. That way, you can still operate your real business of “automotive sales” without being considered a risk factor.