In any business, there are several dynamics and statics at play. Often, while understanding how a business works, these factors are interpreted individually like ideating a product, procurement of resources, production, marketing, distribution, and sales.
However, when a business sells multiple or similar products to different customers, through varied channels, classifying those under an umbrella category is not conducive to their proper management. The term “Line of Business”, hence, is used to categorise those sets of products more comprehensively, which contributes to their better management.
In simple terms, a line of a business denotes a selection of products or services that are handled by unified management, throughout their life cycle. Theoretically, this term can be applied to any industry. But, in practice, it is much more prevalent in the service sector including the banking and insurance industries.
A line of business unit is defined by bases like customer size or type. For instance, suppose there’s a company that sells eyeglasses, both for regular use and welding variants. Naturally, the customer types for both these products will be exceedingly different, and the same goes for the sizes of their customer base. Even the production processes in this regard shall vary.
A person in a white-collar profession will not buy welding glasses under ordinary circumstances. Thus, the marketing of these products, their distribution, and even the payment method will vary between regular spectacles and welding glasses.
If a single management that oversees both these product lines, inefficiencies in the process might arise. Therefore, lines of business units are established, where separate management teams are involved.
As mentioned previously, lines of business units can be found in several industries; however, its predominance is noticed in the banking and insurance sectors. Therefore, the examples cited below pertain to those.
In general, credit cards allow individuals to utilise a line of credit to pay for a range of expenses. However, terms of a personal credit card and a business credit card vary significantly.
Hence, financial institutions have separate line of business units to manage each product.
Just as loans, deposit accounts also cater to individuals and businesses separately. For example, a salaried individual cannot hold a current account. Also, the volume of transactions carried out through a business deposit account and a personal savings account will tend to vary. Thus, these accounts are also managed by a separate line of business service units in a bank.
Mergers and acquisitions is a highly specialised line of business in investment banking. These organisations primarily advise companies in all the financial, legal, and taxation aspects of undertaking such endeavours.
This is a consultative service provided to affluent individuals or high net worth individuals (HNI). Companies that offer wealth management services handle the finances of such individuals, and tailor financial strategies for them across different products and services.
This includes exploring different investment opportunities, among others. HNIs can invest in a variety of instruments like financing invoices of businesses, providing advances based on a company’s revenues, etc. With KredX, individuals can invest in invoices of blue-chip companies and earn lucrative returns.
Insurance is another industry where there’s a massive difference between services to individuals and businesses. Policies customised for companies involve –
The types of insurance policies available to individuals, on the other hand, include –
By nature, these services demand varied management, and thus, a separate line of business units.
Understanding different line of business units aids in the analysis of investments in vehicles like invoice discounting, lease rental discounting, and revenue-based financing. Because that way, investors can interpret how different market conditions can affect their returns, generated from these options pertaining to different lines of business.