How important is the name you choose for your business when it comes to getting approved for loans, credit lines and business credit?
Well, it's way more important than you think it is.
Topics to Disucss
How to avoid a business name that will get you automatically denied for credit and financing.
How to avoid names that make you face greater underwriter scrutiny.
The perception that your name has to prospective customers, customers, lenders and credit issuers.
Setting up your business the right way, with the right name, or fixing a wrong name so you can still have the best chance to getting the most money at the best terms for your business.
Entity type, NAICS codes, and why you need to choose the right NAICS code for your business.
The name you choose for your business is very important when it comes to your fundibility and your ability to get credit and financing. The reason why is because lenders and credit issuers typically look at high risk industries and put them in one of two categories.
Restricted
The first bucket is the restricted category. By restricted, we mean no-go. If lenders know that you're in a industry within the restricted category, they absolutely are not going to help you.
If you choose the wrong business name, one that reflects you're in one of these restricted industries, you're automatically going to be denied in almost all cases when you go to apply for credit cards, credit lines, or loans. This is programmed into the algorithms which these computers are using to either generate an automated approval, a push for a manual review, or an absolute flat out denial.
So you should avoid these industries altogether, or names that indicate you're in these industries. Some other examples include ammunition, weapons, and porn. These are all in restricted industries where a lot of lenders and credit issuers absolutely will not lend money if they see that you're in these industries.
The one way to tip them off is having a name that actually indicates that. So if say for example, Bail Bonds is in this restricted industry, we wouldn't want to name your company Chico's Bail Bonds. You'd be better off to go with Chico's and choose an NAICS code that still reflects what you do, but doesn't necessarily indicate that you are an actual pawnshop.
Non-Restricted
The second category your business can fall under is the non-restricted category. With this category, you face greater underwriter scrutiny. Again, there's really two high risk buckets that lenders or credit issuers can put you into. You want to avoid being in either one of them.
Where restricted status will get you automatically denied, non-restricted makes it to where you face greater underwriter scrutiny. Non-restricted means you're in an industry that's seen as high risk by lenders and credit issuers, but not so high risk that they will automatically deny you.
You typically will get pushed for a manual underwriting review, and oftentimes get denied, pay higher interest rates or get less money than you could if you went through that same system and got an automated approval.
Now there's a lot of examples here. One of the most common of which is financial services. Accountants, attorneys, people dealing with credit financing, credit repair, are all seen in financial services. Financial services is seen as a high risk industry.
It's not restricted in that lenders and credit issuers will still lend, they'll still issue credit a lot of them to those in those industries. But if your name reflects and you're in one of these industries, you're definitely going to face greater underwriter scrutiny.
For example, at Credit Suite we knew this when we named our company. Having the word credit in our name makes it harder for us to get merchant accounts, bank accounts, loans, credit lines and credit cards.
You have to really choose wisely between having a business name that reflects what you do so your customers know more about you just based on the name. Also, you've got to make sure that you're choosing a name that doesn't put you into one of these high risk categories and make it to where you either face greater underwriter scrutiny or get an automatic denial when you go to apply for credit and financing.
Choosing the Right Name
So how do you choose the right business name or even industry that keeps you out of these two buckets? Well, the first thing to know is that you are the one that chooses the industry that you're actually in, meaning that there's an NAICS code, or an industry code, that's used kind of as a designator to determine what industry you're in.
You're the one that needs to know what the NAICS code is. You're the one that needs to use that code in that exact designator whenever you apply for credit or financing. What happens a lot of times is you go to set up a bank account and they ask, "What industry are you in?" and you say something general like consulting. Similarly, you go to apply for credit or financing and you do exactly the same thing. Well, you don't want to do that and here's why.
If we look at real estate, for example, there's over 30 subcategories of real estate that you could actually be in. So if you apply for credit financing and say you're in real estate, then you really are depending on the lenders & credit issuers to then determine which of those 30+ categories you could be in. If they choose unwisely and put you in higher risk, they report that to other lenders & they report that on your business credit reports. All of a sudden all types of other lenders and credit issuers are seeing you as high risk at the exact same time.
So first of all, an NAICS code is an industry code. It's a way of designating what industry you're in. And really, this was created, for example, by the IRS, where they're using it to compare your business expenses to other businesses in the same industry to see if there's anything that's fishy or questionable. The SEC uses industry codes, as well as lenders, credit issuers, the business credit reporting agencies, and many, many, many other trade organizations and other groups as well. So first thing you want to do is go to naics.com and try to find the actual indicator that best fits and describes what you do.
Now, keep in mind, you oftentimes can choose between one, two, or three. So let's use Credit Suite as an example. We're big on educating about credit and financing. That's what we're doing right now. We also have software that helps business owners through the process of improving their fundibility, building their business credit, and getting financing. We can also easily be seen as being in financial services, but some of those three increase the multiple of our business. So if we ever want to exit the business, and we choose, for example, financial services, or software, well, those are worth more than being in the education space, we'll get a greater value for the business, if we're in one of those industries, versus being an education.
Yet when it comes to getting credit or financing, Financial Services is seen as high risk. So if we choose that option, then it's harder for us to get credit and financing. So knowing that we might choose to do what we've done, which is go with being a software company. This is because it will get us the best multiple when we exit the business. Also it puts us out of the high risk restricted category sections that a lot of lenders and credit issuers choose.
That's exactly what you want to do. You want to look through the NAICS list, figure out what ones you could actually choose from. what ones do or could reflect what you do. Then choose ones that keep you out of the high risk categories, that also will still give you the best valuation when you go to actually exit and sell your company.
Industries to Avoid
So how do you know which ones to actually avoid? Well, there's a couple of different ways to do it. You can go through and just do a general Google search of how to avoid high risk NAICS codes. If you do that, or even search on our blog, you'll find credit suites blog talking about a lot of different industries, how industries are perceived, and which ones to avoid.
Now, naics.com also publishes a list as well of industries that you want to avoid. Their list even has the actual codes that you want to avoid. So those are some starting places.
Now again, depending on your industry, you might not really have a choice to choose between one, two or three, it just might be what it is, but you never want to choose something that doesn't really reflect what you do. Again, you just want to understand what industries are perceived as high risk and make sure that if you have a choice between a few of them that really could describe what you do. Then you go with one of the lower risk options than one of the higher risk.
Since you're already focusing on your business name, go ahead and make sure that you have the right entity type setup as well. You want to avoid being a sole proprietorship and even a partnership if you can. Corporations are the most highly regarded entity type per lender and credit issuers perception. So you want to try to stay with an S corp or a C Corp. This gives you the most credibility when it comes to lenders and credit issuers. You also could choose an LLC. even though it's not an official entity type for the IRS being an LLC or being a corporation is what gives you the most credibility with lenders and credit issuers.
Now if you've done this the right way, you know what your NAICS code is, you've chosen one that keeps you away from being high risk from facing greater underwriter scrutiny or getting an automatic denial. Now you know what your code is, you know the exact designator whenever anybody a bank that you're setting up a bank account or merchant provider where you're setting up a merchant account a lender or creditor when anybody's asking what industry you're in, you put the exact code the exact designator and
Now that you're doing this, you want to go back and make sure your taxes reflect that information. And you also want to check with Dun and Bradstreet, Equifax, and Experian commercial to make sure the credit reporting agencies all have the right information or dispute with them to correct it.
Now you've fixed everything you might have done wrong in the past and moving forward. Always use that industry code in the exact designator and that will keep you out of those high risk buckets and help make it easier for you to be able to get more money at better terms to grow your business.
Now that you know more about industries to avoid How to Choose the Right NAICS code and choose the right industry as well as set up your entity the right way you're well on your way of being able to get credit financing
Transcribed by https://otter.ai
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