The Barter System - Is It for You?
Whether you are starting or growing a small business, using a barter system preserves working capital to apply to your venture. Also called in-kind trade, trade-outs, counter-trades or contra agreements, this process can fund day-to-day operational expenses without cash outlay.
By definition, bartering is the exchange of goods and services for other goods or services. Research indicates that nearly one-third of U.S. small businesses use some type of bartering system (Barter News Weekly). Even so, some experts believe companies are not maximizing their own barter possibilities.
Benefits of Bartering
A barter arrangement's most obvious value is insignificant cash savings, as well as reduced financial paperwork -- but there's more. Bartering also:
- Generates sales/profits with faster inventory and service-hour turnover
- Creates new customers by bringing together parties who may refer others
- Moves surplus stock
- Eliminates additional advertising and deep discounts
When to Barter
A barter system can involve swapping big-ticket items, but many small-company owners stick with products and services required for routine operations. These include:
- Office supplies, printer/toner cartridges, food service, renovations/repairs
- Printing, computer products/services, trade show booth space
- Communications, Internet access, cellular phones, electronics
- Staff incentives and community sponsorships
- Financial services, legal advice, health care, advertising or promotion
How It Works
The barter process, unlike a cash transaction, requires no exchange of money between trading parties. However, barter dollars are identical to real dollars at income tax-time, so owners must report the fair market value of goods received on their tax returns.
In fact, entrepreneurs should treat barter revenue like any of their other business activities, making sure to:
- Keep good records.
- Specify the retail value of products being exchanged.
- Work with a good barter exchange.
- Consult a tax professional, if necessary.
- Complete Form 1099-B (if a barter exchange member).
A barter exchange is an organization that facilitates trade between group members. Exchanges also act as banks, recording transaction values, and member-account activity.
Barter exchanges serving small and medium-sized businesses are often referred to as retail barter exchanges. By contrast, corporate barter exchanges have provided alternative channels of distribution for the goods produced by large corporations.
Traditional barter exchanges generally serve either small businesses or large corporations, but not both. This is because these exchanges are simply too small to provide a sufficient outlet for the inventory available from large corporations.
They also give unprecedented exposure to potential new customers through:
- Listings in online and other directories
- Member recognition through barter newsletters, catalogs, and product expositions
- Fellow network-member referrals
A modern business-to-business barter exchange eliminates the one-to-one limitations by making multi-party trading possible. Parties no longer have to find the exact match of needed goods and services between the buyer and seller because the exchange provides a marketplace.
The marketplace uses trade credits as the medium of exchange. Trade credits are a non-cash currency that facilitates trading. The more businesses that participate in the exchange, the more likely each will find what it wants to buy and gain new customers for its goods or services.
Trade credits make full value trading possible. Businesses exchange their products or services at full value, but generally with significantly lower variable costs. This results in increased profitability. Barter is particularly beneficial to businesses with excess goods or services, especially if those products are perishable.
When selecting an exchange, contact an industry trade association such as the International Reciprocal Trade Association for a list of member groups. Then, do some digging:
- Contact colleagues and clients for references and check with the Better Business Bureau or the Chamber of Commerce for satisfaction ratings or complaints.
- Make sure an exchange offers products or services that fit your needs.
- Consider size. Larger exchanges can provide better opportunities to make appropriate trades. Upon gaining a bit of experience, consider joining additional exchanges to broaden your options.
- Evaluate membership dues and other fees. Expect to pay a one-time fee of $200 and up. Each trade could incur a cash commission of 10 to 15 percent.
How to Establish a Trading Partnership
The most fruitful bartering partnerships typically start with an organized plan. Veteran barterers are likely to make a list of products they need but are unable or unwilling to purchase with cash. They also will identify possible trading partners. These may include business associates, existing customers and members of local exchanges. Once the lists are in place, they will:
- Gather references on the trading partner prior to opening negotiations.
- Initiate discussions with the owner or CEO of a potential business partner.
- Document all agreements and procedures.
- Train staff on trading procedures, which do not include standard invoices.
- Re-evaluate partnerships annually to ensure continued benefits.
Protecting Your Interest
While bartering can be a boon for companies on tight operational budgets, problems may arise. Here are some words of caution:
- Barter exchanges are often profit-driven associations. Compare groups to examine benefits and membership costs, and to obtain member references.
- Beware of troubled companies seeking bankruptcy – you may never receive your share of the barter agreement.
- Attach a time or monetary value to the barter. Both parties should compare the barter in a quantitative fashion.
- Record any conditions or restrictions prior to signing an agreement.
- Offer a product or service at the advertised retail value. Do not over-inflate.
- Don't undermine trades with junk or rejects. Quality products will reap quality goods.
- Always be sure a trade arrangement is in the best interest of your business.
By observing a few rules, doing some homework and applying a good measure of common sense, most businesses can reap the rewards of bartering. A better cash flow, new business, and a fresh marketing path are within easy grasp.