In the world of small business lending and insurance, classifying and profiling businesses is crucial for accurate risk profiling. Industry codes, such as the NAICS (North American Industry Classification System) and SIC (Standard Industrial Classification) codes, and general liability code (GLC) have long been the go-to tools for this task. However, there are instances where these codes do not provide enough granularity, posing challenges for lenders and financial institutions.
The Limitations of Industry Codes
Industry codes are designed to categorize businesses into specific sectors based on their primary activities. While this framework works well in most cases, certain businesses can fall into broader categories that include both risky and non-risky business entities. Here are some examples:
Firearm Retailers
Firearm retailers often fall under the NAICS-6 code 459110 (Sporting Goods Retailers). This classification groups firearm stores with general sporting goods stores, which can be problematic for lenders who assign higher risk to firearm sales.
Cannabis Retailers
Cannabis retailers are typically classified under the NAICS-6 code 459991 (Tobacco, Electronic Cigarette, and Other Smoking Supplies Retailers). This code lumps cannabis retailers with tobacco retailers, creating difficulties for lenders who want to distinguish between these two types of businesses.
Pawn Shops
Pawn shops are usually classified under the NAICS code 522299 (International, Secondary Market, and All Other Nondepository Credit Intermediation) or sometimes as 459510 (Used Merchandise Retailers). This ambiguity can make it challenging for lenders to identify pawn shops solely based on their corresponding industry code.
Non-Profits
Non-profits do not have a single industry code and are classified based on their activities. Identifying these organizations requires additional data points beyond industry codes.
Solutions for Enhanced Business Classification
Given the limitations of industry codes in certain cases, lenders and financial institutions need to employ additional methods to identify specific types of businesses they want to monitor.
1. Utilizing Keywords and Descriptions
Businesses often describe their primary activities on their websites, social media profiles, and business directories. By collecting and analyzing these keywords and descriptions, lenders can gain a clearer picture of a business's actual activities. For example, a store that primarily sells firearms will likely highlight this in its online presence.
2. Leveraging Registries and Identifiers
Federal registries and specific licenses can serve as reliable identifiers. For instance, firearm retailers must have a Federal Firearm License (FFL) issued by the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF). Similarly, nonprofits are often listed in national directories. These identifiers can provide concrete evidence of a business's classification.
3. Combining Multiple Data Sources
The most effective approach is to combine various data sources. Secretary of State business entity records, federal registries, and online business profiles can collectively offer a comprehensive view of a business. This multi-layered approach ensures that lenders and financial institutions can accurately classify and assess businesses, even when industry codes fall short.
