Small business owners have a number of balls to juggle with a wide range of daily tasks and long-term plans that require their constant attention. But there is one resource that can easily be employed that will benefit your business in a number of ways — having a NAICS code.
The process of acquiring a NAICS code is simple and straightforward and can qualify a business for government contracts as well as fuel sales, marketing initiatives and much more.
What Are NAICS Codes?
NAICS, short for North American Industry Classification System, is a coding system used to categorize businesses by industry. Pronounced NAKES (like “snakes”), this six-digit business NAICS code category was created by the federal government of North America. The collaboration involved the United States, Canada and Mexico and was initiated in 1997 with changes and updates made to the categorization system every five years. (The last update was made in 2017.)
The classification system largely replaced the older Standard Industrial Classification (SIC) established in 1937. One reason for the introduction of NAICS was to accommodate new industries and economic forms of output that were not around prior to the 1980s. One example is illustrated below and highlights the emergence of the digital sector and the contributions made to the economy.
Another reason for NAICS was to widen the economic picture and statistic and data gathering web to cover all of North America, especially in response to the introduction of NAFTA (North American Free Trade Agreement).
Key Differences between NAICS and SIC Classification Systems
Both NAICS and SIC codes are still used by the U.S. government to classify businesses for the main purposes of compiling, analyzing and releasing statistical data related to the U.S. business economy. Though NAICS is the more prominent of the two systems, SIC codes are still used today but have not been updated for nearly 40 years and do not incorporate categorizations for new businesses and industries.
As a result, new companies focused on artificial intelligence (AI), information technology, computer software, cloud and data storage services, etc., are not represented in this older system that was developed to cover more traditional manufacturing-based industries as opposed to service-based companies.
Unless you’re a government contractor, you are not required to have a NAICS code. (We’ll get to government contractors a little later.) However, assuming that your business, whether a Limited-Liability Company (LLC) or other for-profit entity, does not bid on government contracts and that your company focuses on the private sector, there are a number of other advantages in acquiring your NAICS code.
So although “need” may be a strong word, having a NAICS code for your business would be a good — if not great — move. Let’s take a closer look by breaking this down and exploring a few key reasons for having a NAICS code assigned to your company.
The Benefits of Having a NAICS Code
1. Federal Contracts
The first benefit is more aligned with vendors seeking out government contracts. In order to participate in government projects, you’ll need a NAICS code. There’s really no way around it if you want the work from the federal government. In fact, having a business NAICS code category is the only way to get in the door, bid for projects and get awarded contracts.
This can cover a wide range of companies, including construction, engineering and tech industries. Having a NAICS code also allows the government to classify your business and identify your industry, sector and primary outputs by collecting relevant business statistics.
2. Grants and Incentive Programs
Having a NAICS will also open the door when it comes to incentive programs, including grants. Make sure to take a look at your state’s government website and you’ll find lists of programs with an explanation detailing the incentives.
One example of when a business can benefit from having a NAICS code is New York’s Energy Cost Savings Program. This program allows eligible businesses to reduce their energy costs by up to 45 percent. But before you can submit the application, you’ll need a NAICS code to meet the requirements.
3. Tax Credits and Exemptions
Depending on your business, you have the opportunity to apply for credits and exemptions that align with your industry. This can include deductions covering farming and agriculture, manufacturing, employee training and retention and research and development, just to mention a few. An online search of your state’s department of taxation and finance is a great way to begin the search and confirm eligibility.
4. Loan Approval
Having access to money is critical when running a small business. Whether it’s buying new equipment, making upgrades or expanding a product line, small business owners will need an infusion of cash to meet their needs. Many banks and commercial lenders use NAICS codes when it comes to small business loan consideration and approval.
Having the right NAICS code assigned to your business gives a lender a better idea of the risks when compared against other businesses in your industry. This also helps avoid potential inaccuracies that can lead to a loan rejection.
5. Marketing and Research
Many companies use NAICS codes to classify their vendors, partners and customers by industry. This allows a business to have a better understanding of their industry and compile data and statistics that can gauge the market, target potential clients and keep up with trends. This research is not limited to targeting customers and opportunities but can also be utilized to monitor the competition.
How Do I Find My NAICS Code?
After going over the key advantages of having a NAICS code for your business, it should be clear that acquiring one is a positive move that can benefit your company regardless of whether it's an LLC, C Corp or S Corp. ) It is important to know, however, that no one assigns you a NAICS code.
The system is self-assigned and the responsibility falls on you. The good news is that the process is fairly easy and can be done at any time, though the sooner you begin, the sooner you can benefit by having a code linked to your business. To get started:
Find the code or codes that best represent your primary business.
If your company has multiple outputs (products and services) that are core to your business, then you can have multiple codes as long as they properly represent your organization and you have active business activity.
Luckily, the system will give you a list of options for you to choose from. Select the option that best aligns with your primary output. In this example, since we are a health food company that makes and sells salads, the best option is “Health food, fresh fruits and vegetables, merchant wholesalers.”
By clicking the corresponding code of 424480, the screen will scroll down to a list of corresponding businesses that match your organization. For Fresh Salads XYZ, the code would be 424480 with the corresponding entry of “salads, prepackages, merchant wholesalers.”
Using NAICS to Grow Your Business
We’ve established the benefits of having a NAICS code for your business if you rely on government contract work. Having a NAICS code is a requirement to participate in government bids and contracts. Without one, your company is dead in the water and ineligible for government work. Now let’s explore how having your NAICS will help you develop your business in the private sector.
The key benefit many businesses utilize with the NAICS codes comes down to marketing initiatives. For example, if you are a service-based industry, your NAICS code can help you target specific industries and the ideal customer and also identify potential new markets and opportunities. The NAICS code can also help with when it comes to competitive research by learning more about other companies in your sector.
As a business owner looking for ways to find the ideal customers for your product or service, you can use NAICS codes to collect data and initiate a targeted marketing campaign. NAICS data can help identify the ideal customer by location (geography), business size (number of employees), annual sales and other defining characteristics and data points that will help fine-tune your search.
The same data collection method used to find partners, vendors and customers can also be used to study the competition and gauge the trends and direction of your sector.
Creating a Niche Market with NAIC Codes
Let’s look at an example of how you can use the NAICS classification system to create a niche market and launch customer outreach and advertising campaigns. For the purposes of this case, let’s go back to our health food business that packages and sells salads through Fresh Salads XYZ. We’ve already established how you would find your NAICS code, which is the self-assigned number of 424480. Let’s now see how you can get started and grow your businesses by finding potential customers that will stock their stores with your product.
492210 Restaurant meals order and delivery services (i.e., independent order and delivery services)
722511 Family restaurants, full service
722513 Carryout restaurants
Once you identify other businesses that relate to your product, you can then proceed with finding the restaurants, delicatessens and grocery stores in your areas that can become potential customers.
Sites and services like the NAICS Association and Reference USA offer custom searches by business type, geography, size, sales, etc. Using the NAICS code, state and city information, you can view data related to potential clients, vendors, partners or competitors.
Compile your research and get your data in order by creating business profiles and contact lists. The NAICS Association can also speed up the data collection process by providing you with targeted lists organized by industry. The service also provides 50 free sample records as a tryout before you sign up for a plan.
Having the necessary research, telemarketing, email, social networking and other forms of outreach can help you expand your business and save time by targeting the right clients.
NCAIS Coding System: Frequently Asked Questions
Hopefully, the information provided above has answered most of your questions, including how to pronounce NAICS. (Remember, it rhymes with “snakes,” “fakes” or “bakes.”) We also pointed out that your business can have more than one NAICS code as long as it has multiple revenue-producing streams of income, including products and services. But in case you still have questions, these frequently asked questions will help.
Does my NAICS code need to be approved by a government agency?No. Your code is self-assigned, meaning you are the one that designates it and chooses the right code or codes for your business. There is no central authority or agency assigned with monitoring or approving NAICS codes for businesses.
Do I need to have a NAICS code to qualify for a Federal contracting opportunity?Yes. To qualify for a government contract, you must register your company with the Federal government System of Award Management (SAM) where you will need to provide your NAICS code.
Is there a fee or annual renewal cost?No. There is no fee or renewal cost for your NAICS. Associated fees cover supporting services provided by the NAICS Association, including access to business databases and company marketing lists.
How do I revise or update my NAICS code? According to the NAICS Association site, “There is no 'official' way to have a company’s SIC or NAICS code changed. Various Federal government agencies maintain their own lists of business establishments and assign classification codes based on their own programmatic needs.” If you filled out a government survey or census report, the best way to correct the NAICS now used by these agencies in connection to your business is to reach out and request a change. Though these agencies are using the incorrect number, it is for their data collection purposes used in statistical information, survey or census reports. Depending on the agency, the process may range from straightforward to challenging.
How can I get a new NAICS code created from my business type? NAICS are reviewed every five years to keep pace with the changes made to the economy. The Office of Management and Budget (OMD) will solicit public comments through a notice posted in the Federal Register. The comment period will last for 90 days and the next batch of new codes will be released in 2022.
Do NAICS codes apply to businesses formed by a non-U.S. citizen? NAICS covers the nations of North America, including Canada and Mexico, and unlike SIC, is not limited to U.S. companies. If your company is based in North America and is involved in economic activity, then your business can participate in the NAICS classification system.
Supporting Your Business Growth Needs
Even if you're just getting your company off the ground, having the proper NAICS code or codes aligned to your LLC will only work for your benefit by opening doors with federal contracts, grant programs and incentives, and acting as a marketing resource to target your customer search, study the competition and gauge the direction of your industry. It is also one of the many important decisions that you will need to make as a business owner.
Adding value to your company and finding opportunities for growth while also connecting with clients and offering a reliable product or service is a key part of entrepreneurship and success. But the challenges do not have to be faced alone. If you need assistance when it comes to your business — file preparation, marketing, funding, administration, etc. — Incfile has you covered with a complete guide to starting a business.
Peter Mavrikis is an author and editor with over 25 years of experience in publishing. He has worked as the Editorial Director for Barron’s Educational Series, as well as Kaplan Test Prep, where he ran the test prep, foreign language, and study guide divisions. Peter has also written several books on history, exploration, science, and technology.