The other day I was helping one of our clients put together an SBA loan. The borrower owned a gas station, and had prior SBA loans. The lender’s credit analyst was relatively new and I was helping with the SBA requirements.

CLYDE CREDIT ANALYST. Here’s the deal, Richard. We have two  other gas station loans for this guy in our portfolio – same owner, same EIN – but the NAICS is different for the new loan. The NAICS for the new loan is 457110-Gasoline Stations with Convenience Stores. But both of this guy’s other gas stations have the NAICS 447110. So I looked up that NAICS, and it was for Gasoline Stations with Convenience Stores, just like 457110. What’s up?

ME. First of all, I knew that credit analyst was destined for greatness, because he pronounced “NAICS” correctly (like snakes, without the first “S”) and he spelled out “E-I-N” instead of pronouncing it like the German word for “one.”

Yet the kid had me. Clearly the businesses were the same: Gas Stations/C-stores. No, there was no typo and  nothing to suggest that the data was wrong. So why a different NAICS for the same type of business?

Turned out, that between the old loans and the new one, the NAICS for gas stations had changed. Note: The business itself did not change. Instead, the NAICS code for Gasoline Stations with Convenience Stores changed. How it works:

NAICS Code definitions are published by the OMB and then in the NAICS manual. Codes are revised every five years based on such factors as size and projected growth of the industry. 1 So if you have a 25-year loan in your portfolio, its NAICS code might have changed more than once.

NAICS codes were last revised in 2022, the year before the SBA published the Final Rule on Affiliation and Lending Criteria for the SBA Business Loan Programs (88 FR 21074, effective May 11, 2023) which required SBA lenders to consider the 3-digit NAICS as part of an affiliation determination. Plans are already underway for the 2027 update. In fact, in September 2023, the Census Bureau announced that the NAICS update progress sheet is now available.2

Yet there is no official way to change the NAICS code for a particular type of business. Various federal government agencies maintain their own lists of business establishments, and assign classification codes based on their own programmatic needs. So the business itself must contact the agency that has assigned the code it believes should be changed.

CLYDE CREDIT ANALYST. Richard, thanks for the information about NAICS. Now, we all wait for the 2027 update. Until then I guess we use the most recent NAICS as a tool in determining affiliation.

Richard Jeffrey
Senior Associate
richard@jrbrunoassoc.com
www.jrbrunoassoc.com

 

[1] https://www.bls.gov/respondents/ars/2022-naics.htm

[1] https://www.census.gov/naics/reference_files_tools/NAICS_Update_Process_Fact_Sheet.pdf