Understanding data has always been an important part of running a business. Most business owners can tell you every important data point concerning their business from what it costs them to acquire a customer to the amount of times that customer comes back to reorder.
Banks and lenders are no different than businesses, they also use data to flag situations that could create an issue or that may cause them to miss opportunity.
One data point that’s constantly analyzed by lending institutions are SIC/NAIC codes and how they perform on their loan.
A business’s SIC (Standard Industrial Classification) code or NAIC (North American Industry Classification) codes are used to monitor industry types and how they perform on loans.
If a bank notices that a specific industry code seems to have a high default ratio then they could pull back the reins when it comes to lending to those industries. This happens all the time in business lending. These industries are known as either “restricted” meaning they will limit the business from standard lending protocol, or “prohibited” which means excluded and not able to be reviewed for a loan.
Its important as a business owner to understand if you have one of these businesses, if you do you will need to understand how it will affect your ability to obtain capital as you build your company.
Some examples of restricted industries who historically have higher default ratios are:
- Auto Sales
- Home Improvement Businesses
- Pawn Shops
- Any home based business
- Cell phone resellers
- Direct Marketing
- Collection companies
- Financial companies
- Real Estate or Property Management
These are just a few examples of restricted industries and as I mentioned earlier you will see industries added and removed from this list as new data comes in to the bank or lender.
Does this mean you are never getting financed if you are in one of these industries?
The answer is no, it doesn’t, but what it does mean is that you need to be a bit better than the norm.
Here are some things business owners need to be cognizant of when in a restricted industry.
Personal and Corporate Credit
Good credit gives underwriters warm and fuzzies and can push a loan off the fence into the approved category.
Length of time in business
Many lending institutions consider any business less than 2 years old as restricted.
- Are your SOS records up to date, is that address listed on the SOS match your actual business address?
- Do you have a commercial location but still use your home address for your business?
- Do you have a website? Are you listed in the 411 directories? Do you have transparency online?
- Are you running your business as a Sole Proprietor instead of an LLC?
- Do you manage your cash flow well and do you use conventional banking?
- Are you a home based business?
Its important to know what to expect when it comes time to borrow money, not just so you can prepare yourself and buckle down in certain areas of the business, but it’s also important so that you don’t waste time trying to get financing from the wrong institutions.
There are some industries that will never be able to obtain financing from private lenders and some that will never obtain financing from banks. Knowing that will create less frustration for the business owner when its time to seek capital for the business.
This article may seem elementary for some, but trust me its not to everyone. I speak to about 30+ business owners a week and its surprising how many who are in these industries are not aware they will be scrutinized more heavily than other industries.
At Bentley capital we have funding solutions for all so if you have questions concerning your company feel free to reach out to use for advice.