In a recent episode of The Shades of Entrepreneurship, I got a little technical with the founder of Burnside Knives, Rick Maderis.
Burnside Knives is an American Knife company established in 2015 by designer, Rick Maderis in Portland, Oregon.
Burnside Knives slogan is ESSENTIAL TOOLS FOR OUTDOOR ENTHUSIASTS & WORKING PROFESSIONALS LIKE YOURSELF.
I know, I know—I promised not to make things too complicated, but I also promised to teach you something new!
So today, let’s dive into something a bit dry but extremely important for entrepreneurs.
Unlocking the NAICS Code: Why Entrepreneurs Should Care About Industry Classification
What Is NAICS and Why Should Entrepreneurs Care?
North American Industry Classification System, or NAICS, (pronounced "nakes") is the standard used by U.S. federal agencies to classify businesses for statistical purposes, allowing them to collect, analyze, and publish data related to the economy.
Essentially, it's the system that organizes industries into specific categories, helping businesses and government entities make sense of the complex web of industries.
But why should an entrepreneur care about this code? Let’s break it down.
A Quick Breakdown of NAICS Codes
Imagine you're starting a business in manufacturing. Under NAICS, manufacturing falls under sectors 31-33. But it doesn’t stop there—the classification gets very specific.
For example:
Manufacturing food for humans? You’d fall under NAICS 311
Manufacturing pet food? You’d fall under NAICS 311111
Manufacturing food for other animals? That’s NAICS 311119
Every single type of business has a NAICS code that defines it. This classification system was established in 1997 to replace the old Standard Industrial Classification (SIC) system and was developed jointly by the U.S., Canada, and Mexico.
Why? To create a system that allows for seamless comparability in business statistics across North America.
Why Entrepreneurs Should Pay Attention to NAICS Codes
Here’s the important part for entrepreneurs: NAICS codes are critical for market research, business strategy, and customer targeting. Companies often use these codes to classify their customers by industry.
So, as an entrepreneur, understanding your NAICS code can help you:
1. Target your marketing efforts: By identifying businesses within the same or similar NAICS codes, you can focus your marketing efforts on the industries that are most likely to benefit from your products or services.
2. Understand your competitors: Knowing the NAICS codes for businesses in your sector can help you analyze your competition and better understand the marketplace.
3. Federal contracts and incentives: Some federal contracts and incentive programs are only available to businesses with specific NAICS codes. For example, Small Business Administration (SBA) certified companies can take advantage of government contracts reserved for certain industries.
4. Risk management: Entrepreneurs should be cautious when selecting a NAICS code because some industries are considered "high risk." High-risk industries—such as automotive sales, the travel industry, restaurants, and real estate—tend to have more stringent lending guidelines and higher interest rates. The wrong code could make it harder to secure loans or result in unfavorable terms.
NAICS Codes: The Key to Unlocking Business Insights
Understanding your NAICS code gives you more than just a label—it gives you insight into your industry, the market you’re entering, and the potential risks and benefits associated with that industry.
For example, if your business falls into a high-risk industry like real estate or general contracting, lenders may view you as a higher risk, resulting in higher interest rates or more strict underwriting guidelines.
On the other hand, having the right NAICS code can open doors to:
Tax incentives: Some industries qualify for specific tax breaks or incentive programs that can save your business money
Better lending options: Certain NAICS codes are considered lower risk, meaning you might get better lending terms
Industry-specific programs: Many government programs and contracts are available only to businesses in specific NAICS sectors, which can give you a competitive edge
Avoiding Pitfalls: Choose Your NAICS Code Wisely
One thing to keep in mind: choosing the wrong NAICS code can cost you. It’s not just a matter of statistics—it can directly affect your business’s bottom line.
If you’re classified in a high-risk industry when you’re actually in a lower-risk sector, you could end up with higher loan rates or be overlooked for incentives that could benefit your business.
As an entrepreneur, it's important to make sure your business is accurately classified so you can maximize opportunities while minimizing financial risks.
Dive Into the NAICS Database for Your Next Big Idea
So, what’s the next step? Grab yourself a drink, pull up a chair, and start exploring the NAICS database.
Whether you're in the idea stage or already running a business, understanding NAICS codes will give you a better grasp of the industry you’re entering. Who knows—it might even spark your next big entrepreneurial idea!
Exploring NAICS codes can feel like diving into a sea of numbers, but trust me, it's worth the effort. The more you know about how your business is classified and how your industry operates, the better positioned you'll be to succeed.
So, what are you waiting for? Start researching your NAICS code today—it could be the key to unlocking new opportunities for your business.
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