Businesses That Barter
The International Reciprocal Trade Association (IRTA)
reports that there are approximately 500,000
existing retail trade members and corporate barter
company trade members around the world representing
a $16 billion a year business. Experts estimate that
65 percent of Fortune 500 companies engage in barter
to one degree or another, and the volume of barter
trade is expanding at 15 percent per year.
Every Fortune 500 company uses barter trade.
According to the U.S. Department of Commerce, barter
accounts for 30 percent of the world’s total
business. In all likelihood that percentage will
increase in the years ahead. And in all likelihood,
you as a small-business owner will find yourself
playing the barter game sooner rather than later.
In deciding whether or not to get involved in
barter, the first question a small-business person
must ask is: Do I have something to barter? The
answer is yes for most small businesses. If you have
excess inventory, you have goods to barter. If
you’re a service provider with the capacity to
handle more clients, you have expertise to barter.
To make bartering payoff for your business, experts
suggest that you have a 30-percent to 35-percent
profit margin on the products or services you offer
in barter. This profit margin covers the costs of
barter and allows a small business to get the best
out of a barter deal.
So, your small business has excess service capacity
and has the required profit margin on the goods it
wants to offer in barter. The next question is: What
are the benefits of barter?
Barter Benefits: Cash and Inventory Control
In business, bartering helps you conserve cash and
more effectively manage inventory.
Barter has always been used by business as an
efficient way of increasing sales and decreasing
cash expenditures.
Cash savings is cited as the number one benefit of
barter. By bartering, a small business acquires
goods or services without spending cash. This is a
definite plus for businesses that suffer cash flow
problems or for those trying to save cash. Barter
can also help speed the payment of receivables.
Slow-paying or non-paying customers can relieve
their debts by bartering.
Bartering helps reduce cash outlays for overhead
costs. Many of the services offered through
barter—such as accounting, cleaning, gifts,
restaurant meals and travel—relate to overhead
costs. If you can obtain these overhead services
through barter rather than writing out a check,
you’re saving cash.
“The reason I like barter is because it’s an
effective way of retaining cash when you need to buy
something for your business,” says Trent DiGiulio,
founder of Computer Animation Technology and a
member of the barter organization Tradaq. “People
still need cash, and barter is helpful in preserving
cash as a resource. Plus, there are a lot of
operational costs that are well suited for trading.”
Barter can also provide businesses with an extended
line of credit for little or no interest. When you
barter, you can owe people goods or services, not
money. So you pay no interest on the debt—a major
cash savings.
Bartering also allows you to improve inventory
management by converting excess products into
valuable goods and services. If you barter, you
avoid having to liquidate excess inventory through
drastic discounting. If your small business
experiences seasonal markets, barter provides a
profitable way to use the inventory on a regular
basis.
Barter Benefits: Marketing
Barter gives a small business access to new markets
and customers. Through bartering, small businesses
use a new marketing channel to offer products.
Bartering lets you interact with new businesses and
make new contacts. This helps develop new markets
and expands your marketing dollars.
Many companies involved in barter work in some
aspect of the advertising business, whether it’s
graphic design, printing, layout, audio/visual
production, newspaper ad sales or broadcasting ad
sales. In many cases, barter with these types of
businesses can help improve the quality of your
company’s advertising campaign and marketing
materials.
Bartering also helps generate referrals. As a small
business barters, it extends its outreach and
contacts new customers. This in turn helps generate
referrals that can bring cash-paying customers to
your door.
Barter gives a small business immediate access to a
network of other businesses. In some cases, these
contacts may lead to cash sales outside the barter
exchange, expanding the market for no additional
marketing cost.
One-on-One Barter
Okay, you have some excess inventory. You understand
the benefits of barter. Now you want to get started.
How do you find someone to barter with? The beauty
of barter is its simplicity. You find a business
that has something you need and you offer to barter
something you have in return.
When you begin to barter, keep it simple. Try to
make a few one-on-one barter deals with folks that
you already do business with. Arranging a one-on-one
barter is a matter of creative thinking. Say you’re
an
accountant. Does a car detailing company owe you
money? Why not take payment in a free car wash? Are
you a graphic artist who created menus for a
restaurant that now owes you money for the work?
Take payment in meals and invite one of your
cash-paying clients out for a feast.
Small businesses regularly barter for advertising
with radio and television stations, as well as with
local periodicals. Bartering for media placement
gives you maximum exposure at minimum cost. “During
the 1990s, more than half of the mass media
purchased was not purchased at all, but bartered
for,” says Darrell Berg-Smith a multiple business
owner and marketing consultant
www.darrellberg-smith.com
“I started my business by bartering with
advertisers,” says Fiona Gordon, distributor of
Vincent Davianny beauty products
www.vincentdavianny.com.au. “In the past,
the problem was to match two people who had exactly
what the other one wanted. Now we have thousands of
companies to barter with. I absolutely perceive
barter as a tool for growth.”
As Gordon discovered, the more involved you become
with bartering, the more you’ll find that one-on-one
barter deals can’t meet all of your needs. In that
case, you’ll want to set up a three-way barter deal.
It
goes something like this: You trade your goods or
services to X company. X company trades goods or
services to Y company. You receive goods or services
from Y company.
Sound complicated? It is—or can get complicated
fast. That’s why many business owners rely on barter
exchanges.
Local Barter Exchanges
Local barter exchanges pave the way for three-way
barter deals. A barter exchange is a business
organization engaged in the exchange of products and
services without the use of cash. Basically, the
barter exchange arranges for a whole bunch of
three-way barter deals. The exchange finds
businesses with goods or services to barter,
arranges for different businesses to trade for
different services, and keeps track of everything
for all the members of the exchange.
The barter exchange acts as a fiduciary agent in any
barter arrangement. Typically, trades on local
barter exchanges range from $10 to $10,000. The fees
that the exchanges charge usually consist of
membership dues ($300 - $600) and a small percentage
of the transaction cost (10 percent to 15 percent).
The easiest way to select a local exchange is to
look in the yellow pages under “barter services” or
“trade services.” The International Reciprocal Trade
Association (IRTA), the industry’s main interest
group, estimates that there are more than 400 barter
organizations in the United States and that more
than half of these barter exchanges are independent,
locally-owned businesses. The rest are local
branches of national exchanges.
Well-established, locally-owned barter exchanges may
have between 500 and 1,000 members, although a high
number of members is not the only indicator of an
exchange’s stability or effectiveness.
The benefits to joining a local barter exchange
include:
• Greater possibilities for trade
• Reasonable fees
• Personalized customer service
• Flexibility
• Local management
National Barter Exchanges
As you conduct research into local exchanges, you’ll
come across some trade groups with worldwide reach.
The biggest benefit of national and international
exchanges is the sheer variety of goods and services
available for barter.
For example, The International Trade Exchange (ITEX)
represents more than 100,000 trading partners
worldwide and generates more than $200 million in
trade transactions per year. Tradaq boasts more than
10,000 member businesses and operates offices
worldwide, including in the United States, Canada,
Europe and South America. It’s also expanding its
presence in the Asia-Pacific region. Tradaq
generates trading volumes in excess $130 million
annually and employs more than 250 workers
internationally. Its membership base includes such
giants as Sheraton Hotels, Holiday Inn and TGI
Fridays.
You don’t have to be a corporate behemoth to become
a member of these large trading groups. And you
don’t have to make barter deals worth millions to
participate. For instance, in 2000, the average
business
bartered $4,760 worth of goods and services through
BarterNet, a network with about 48,500 active
members.
But, there are also several drawbacks to joining a
national barter exchange. The quality of each local
branch can differ drastically, even though it’s a
part of a national exchange. Some branches may be
more
successful than others, depending on the knowledge
and commitment of the local staff. And the fees
charged by national exchanges are generally higher
than the fees charged by local exchanges.
Joining a Barter Exchange
Whether you’re considering joining a local exchange
or the local branch of a national exchange, it pays
to do your homework. On average, one barter
organization starts up every week and one dies. With
that rate of turnover, it only makes sense to do
some research before you join a barter exchange.
Before you join an exchange, get straight answers to
these questions:
• Does the exchange belong to any larger barter
groups? Most reputable exchanges belong to the
barter trade groups IRTA or the National Association
of Trade Exchanges (NATE). Also ask if the exchange
has
reciprocal relationships with any other barter
organizations.
• Develop a list of 10 items or services that you
want. Ask the manager of the exchange if those items
are available through the exchange.
• What are the fee structures? Most exchanges earn
their money by charging a membership fee, monthly
fees and trading fees, which are sometimes a
percentage of each transaction. Make sure you
understand the entire fee structure before you sign
up.
• How large is the exchange? Find out how many
businesses are members of the exchange. In general
it takes a client base of roughly 300 active
businesses for most exchanges to be truly
profitable. And profitability means stability.
• Will the exchange be able to trade your product or
services? Ask it straight out, and see if any other
exchange members are offering similar products or
services.
• How are prime items distributed? Some trade items
like airfares, computers and hotel rooms are more in
demand than others. Ask how these items are
distributed among members, and make sure the system
is fair.
• What are the rules concerning
part-barter/part-cash trades?
• How many members are signing up a month? This
figure will give you a good indication of the
strength of a barter exchange.
• How much advertising does the exchange do?
Advertising is key in attracting new members and
getting your barter services out to the public. An
active barter exchange with an active advertising
plan can help spread the word about your business
and help you create new markets.
• Are products and services going at fair market
value or are people marking up their services? Check
certain items for which you know the appropriate
price. You want to make sure that exchange members
aren’t inflating their barter prices to get a better
deal.
• How many businesses are on standby? On standby
means that a member has more credits than she can
find items to spend those credits on. Look for
exchanges that don’t have many members on standby.
• Ask about the exchange’s total trade volume.
• Get a referral list that includes long-time
exchange members. Call and ask them about their best
experiences and their worst experiences. When it
comes to business, horror stories are a lot more
informative than fairy tales. You might also want to
check with the Better Business Bureau and the local
chamber of commerce.
• Go to the barter exchange offices and meet the
people in charge.
Online Barter
It would seem that barter and the Internet would
offer a near perfect blend of business and
technology. However, online barter is in its
infancy. The volatility of the online universe is
reflected in the
volatility of online barter companies.
For example, in the October 2000 issue of Inc
magazine, a panel of experts reviewed six online
barter sites. Today, only one of the six sites still
exists. Bigvine.com, the only site recommended by
the panel, was absorbed by Allbusiness.com, then
transferred to yet another Web site, Barternet.com,
in December 2001.
The bottom line — proceed cautiously with online
barter. If you’re not careful, you could end up
providing a large amount of goods and/or services to
a barter company that may go out of business. Even
with that caution, there is undoubtedly a bright
future for online barter. It’s just a question of
when that future will arrive.
With the tremendous volatility in the online barter
marketplace, it’s important that you do your
research before you start bartering online.
Things to check on the various sites include:
• Length of time in business
• Trade volume
• Fee structure
• Simplicity of application and enrolment process
• Available inventory
• Customer service (can you call a real person for
help?)
You’ll find a list of online barter services and
references in the Resources section at the end of
this article. Visit all of the sites and learn as
much as you can about barter before making a
decision about which service is best for your
business. And don’t be shy about contacting the
service to get referrals to existing members.
At some point in the future, online barter sites
will be able to offer many of the same benefits as
national barter exchanges. At the present time,
however, the online world is so volatile that small
businesses might be better served by sticking to
bricks and mortar barter, especially when first
starting out in the trading game.
Barter and Taxes
If and when you start bartering remember: There are
no tax advantages to barter. The IRS treats a barter
transaction exactly as a cash transaction. All
barter exchanges report transactions to the IRS and
prepare a 1099-B form for each member of the
exchange. In addition, you have the responsibility
of issuing a 1099-B form for any direct trades in
which you participate.
Resources
Here are some online and offline resources to help
you find more information about the practice of
bartering.
Online References
International Reciprocal Trade Association (IRTA)
http://www.irta.com
An informative Web site with information on the
world of barter in general and about the leading
barter trade group in particular.
Barter News
http://www.barternews.com
This is the leading barter business journal. At the
site you’ll find information-packed articles about
the barter marketplace.
Barter Services
http://www.barteritonline.com
http://www.barternet.com
http://www.galaxymall.com/business/barter
(Business Exchange International)
http://www.ibart.com
http://www.itex.com
(International Trade Exchange)
http://www.targetbarter.com
http://www.tradaq.net
