Could Your Company Benefit from a Barter System?

Could Your Company Benefit from a Barter System?

A barter system can provide working capital to companies at every level of development. Also known as trade-outs, counter-trades, contra agreements and in-kind trade, one of the biggest benefits of bartering is the ability to cover routine operational costs with no real cash outlay.

Bartering is defined as the exchange of goods and services for other goods or services. Barter News Weekly, a leading trade publication, suggests that nearly one-third of U.S. small businesses use some sort of bartering arrangement. Still, research shows that many companies nationwide have yet to take advantage of the potential benefits.

The Whys and Wherefores of Bartering

A barter arrangement definitely saves money and cuts down on financial paperwork, but other perks exist, too. A good system, with quicker inventory and service-hour turnover, boosts sales and profits. It also brings together customers likely to refer other leads, moves overstock and cuts out the need for additional discounts and advertising.

While some barter systems revolve around high-end swaps, many small-company owners prefer to deal in more routine products and services, such as office supplies, food service, repair work, printers and computer items. But the list doesn’t end there. Other possibilities include:

  • Staff incentives
  • Community sponsorships
  • Trade show exhibit space
  • Internet, electronic and telephone services
  • Professional services in finance, law, health care and marketing

Unlike a money transaction, the bartering process does not mandate a cash exchange between trading parties. Even so, barter dollars function like their real counterparts at income tax-time. Business owners must report the fair market value of any goods received via barter. This means keeping meticulous records, recording the retail value of exchanged products and dealing only with reputable barter exchanges. Newcomers to bartering likewise would do well to hire a tax professional early in the process.

Barter Exchanges Defined

A barter exchange is an organization that facilitates trade between group members. Acting as banks, exchanges record both transaction data and member account activity.

Retail barter exchanges typically serve smaller and medium size companies, while corporate barter exchanges provide distribution channels for items offered by large corporations. Traditional barter exchanges - too small to be adequate outlets for inventory from bigger companies - deal with either small or large businesses, but not both.

Traditional exchanges offer a number of benefits to newcomers:

  • Internet and print directory listings
  • Member recognition via catalogs, trade shows and newsletters
  • In-network referrals

By making multi-party trading possible, a business-to-business exchange does away with most limitations. For example, bartering parties can use the exchange marketplace rather than having to locate the exact match of needed goods and services between sellers and buyers. The larger the exchange membership, the better chance traders have to find appropriate items and to build a customer base.

Exchanges use trade credits, a form of non-cash currency. Companies exchange products or services at full value, but variable costs usually run lower - with higher profits as the result. This type of barter arrangement works exceptionally well when a company has overstock, especially when goods are perishable.

Finding an Exchange

If the idea of a bartering exchange appeals to you, consult with a trade association such as International Reciprocal Trade Association (www.irta.com). Ask for a list of member groups. Then, do your homework:

  • Call business associates and customers for references. Also, check with the Better Business Bureau or the U.S. Chamber of Commerce for ratings and complaints.
  • Ensure that potential barter exchange candidates offer products or services that dovetail with your needs.
  • Consider going bigger. Larger exchanges offer a greater likelihood of solid trades. Once you have some experience, joining a second - or third - exchange gives you even more options.
  • Consider membership and other fees. Most exchanges levy a fee of $200 or more right up front. Per-trade cash commissions can run as high as 10 to 15 percent.

Trading Partnerships: Do it Right

A detailed plan - written well before the bartering starts - will position you to get the most out of the system. Jot down products you need, and then search for trading partners. The next steps are to:

  • Obtain references on the potential trading partner before entering negotiation
  • Document all contracts, policies and processes
  • Train employees on trading protocols, which preclude standard invoices
  • Conduct an annual partnership evaluation to make sure the agreement continues to benefit all parties

Bartering can be a godsend if your business is on a tight budget, but protecting your interests is paramount. Always compare exchanges regarding membership fees, commission rates and professional reputations. Stay away from companies in danger of bankruptcy, even when they are reorganizing. In individual bartering transactions:

  • Assign a quantitative valuation to the barter transaction.
  • Record restrictions or conditions before you sign a contract.
  • Do not over-inflate prices on an item or service.
  • Offer only quality products. You don’t want a reputation for selling inferior items.
  • Be certain all trade arrangements directly help your company.

Most small businesses can benefit from bartering as long as they research the possibilities, keep good records and observe the rules. In fact, healthier cash flow, more business and a whole new marketing path just may be at your fingertips.