Welcome to SBA’s numbers game. Count ‘em: More than a dozen SBA Notices so far this year. New stuff, added stuff, revised stuff, updated stuff. All important. Kudos to you for reading everything and taking the appropriate action steps. Another numbers game: NAICS codes. Important too. A CDC lender sent me a question the other day that opened up the whole game board.
Larry Lender. Richard, I’ve read through SBA Procedural Notice 50000-20095. Among other provisions it states that SBA will make additional three months of Section 1112 payments (instead of five months) to businesses with NAICS codes beginning with certain numbers. We want to contact our borrowers, but we need to clear something up. Looks like SBA gave some of our borrowers the wrong NAICS. How can I correct this?
Me. If you want to be formal, we’re talking about the North American Industrial Classification System. On more friendly terms, it’s NAICS [NAKES]. Rhymes with snakes. First let’s clarify where NAICS codes come from. SBA isn’t the originator of the system. The Agency is a user.
So What’s it All About? The U.S. Census Bureau assigns one NAICS code to each establishment based on its primary activity – what generates the most revenue. The NAICS collects, tabulates, analyzes, and disseminates statistical data describing the American economy. For example, it’s handy to know how many house-painting companies there are in the US. With that information, we can track whether an industry is expanding or contracting by looking at payroll taxes paid within each NAICS. As SBA lenders, we need to compare how our loan applicant is performing vis-à-vis its industry. We also can compare the applicant’s financial ratios to other firms in the same NAICS. That way we can tell if our house-painting company is performing like other house painters, or better, or worse.
Who Assigns NAICS Codes? SBA doesn’t assign them. Neither does the IRS, although a company’s NAICS is on its tax return. The Census Bureau tells the business what its NAICS is, based on its primary activity. And how does the Census Bureau know that? The business tells them.
What? When? How? Your borrowers don’t know anyone at the Census Bureau. So when did they tell the Census Bureau what their primary activity is?
Usually a business gets its NAICS when it applies for an EIN. The business owner answers the question: “What is your primary business activity?” Then the business is assigned an NAICS to have and to hold, from this day forward, for better or for worse. And if the business doesn’t like its NAICS, who can change it? Not the Census Bureau. They have no formal role as an arbitrator of NAICS classification. In fact, there’s no “official” way to have a company’s SIC or NAICS code changed.
Here’s the “unofficial” way. If the business questions its NAICS, it needs to go back to the Agency that assigned it in the first place. If it was when the business got its EIN, they should go to the IRS. They assigned it. Then, the business needs to file a confirmation statement and wait until its confirmation statement is due, one year and 14-days after incorporation. Or the business can file an early confirmation statement.
Here’s the best kept secret about changing an NAICS: Don’t expect immediate results.
So you’ve passed Go. No $200, but you have information to assist your borrowers!
Senior Associate CDC/504 Programs
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