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November 20, 2008
Small Biz Owners Revisiting Age-old Tradition: Bartering
Before there was money, credit cards and loans, people relied on bartering. Today, as tight credit conditions squeeze cash-strapped businesses, many businesses are rediscovering the benefits of small-biz bartering.
Bartering has come a long way since farmers and merchants gathered at bazaars to trade their harvest and wares. Nowadays, many modern businesses trade through barter exchanges online, though one-to-one bartering transactions still occur.
Since the credit market tightened, many barter exchanges have reported double-digit increases in membership and transactions, according to a New York Times report. Barter exchange Itex Corp. said its registrations jumped 36 percent in October. It now has more than 24,000 members and is the nation's largest barter network. U-Exchange.com, another barter exchange, has had a 70 percent surge in site traffic recently from participants in the United States, United Kingdom, Spain and South Africa.
Often, barter exchange members conduct transactions online and amass credit for future business transactions or personal use. For example, The Plain Dealer (via Cleveland.com) reports of a magazine publisher whose dog needed surgery. She used her Itex barter dollars to pay the vet fees. The vet then earned $1,600 trade dollars that he can use at a later time. The dog owner was able to secure services without dipping into her cash reserves.
Along with conserving cash, bartering is also a way of unloading inventory and finding new customers via referrals. "The biggest benefit is being linked to a host of potential customers that may never have been found," Steve White, founder and CEO of Itex, tells The Plain Dealer.
Barter exchanges track members' barter money and serve as the organizer of the marketplace. Membership fees can range from zero to $20 monthly, and transaction fees go from 5 percent to 7.5 percent. Like a real bank keeping track of business accounts, some barter exchanges also offer credit to members who have been turned away by lenders, the New York Times notes. Last month, barter exchange International Monetary Systems (IMS) issued $2.7 million in trade credit to its 18,000 member network, adding $55 million in established credit lines.
"We base our credit on the products and services that the member businesses have to offer, not on their cash accounts or how they look on paper," explains Donald Mardak, CEO of IMS.
While there are many advantages to bartering, small business owners do need to strongly consider whether it is right for their particular company. The International Reciprocal Trade Association (IRTA), a nonprofit group that promotes barter and trade, provides a test aptly named Is Barter for You? to help businesses figure that out.
About.com: Small Business Information also offers some tips to help small businesses steer through the business of bartering. Among them:
- Beware of troubled companies as bartering partners (if not using a barter exchange) as you may never receive your share of the agreement;
- Attach a fair market value, be it time or money, to the barter; and
- Examine any barter relation against the value it adds to your small business
"Do the normal due diligence when looking for an exchange," adds David Wallace, president of the IRTA. Check with people or businesses that use an exchange and vet your potential bartering partner with the Better Business Bureau, he tells the New York Times.
Businesses also need to keep in mind that barters are treated like ordinary sales in the eyes of the Internal Revenue Service (IRS). "Earning trade or barter dollars through a barter exchange is considered taxable income, just as if your product or service was sold for cash," the IRS explains. Barter exchanges are required to issue Form 1099-B annually to their clients and the IRS.
According to the New York Times, bartering is estimated to generate more than $3 billion through exchanges in the U.S., not including the amount corporations barter directly. Experts recommend that businesses use barter for no more than 5 percent to 15 percent of sales. This helps to avoid pushing out cash business.
In tight economic times, in particular, bartering can be a useful tool for small businesses to have as part of their financial management plan.
Resources
The Cash-Strapped Turn to Barter
by Mickey Meece
The New York Times, Nov. 12, 2008
In Tough Economic Times, Bartering Exchanges Thrive
by Peter Krouse
The Plain Dealer/Cleveland.com, July 14, 2008
Discover the Rewards of Small Business Bartering
Darrell Zahorsky
About.com: Small Business Information
Barter Exchanges
Internal Revenue Service
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3 CommentsThis is a very clear and concise assessment on bartering. It is a healthy option in the current economic climate. I also appreciate your warnings and resources. How much bartering is done on an international level and what resources can be of help?
Thanks, and keep up the great work.
Thank you for the great overview of business-to-business barter. You mention a few of the large exchanges, but I would like to point out that the value of an exchange is not only in its membership numbers, but also in the quality of those members. A barter exchange is only as good as the companies that are a part of it and the customer service representatives who work for it. The point is, not all barter networks are created equal. The real power is within the relationship you have with your account representative, they will be the one driving new business through your door and helping you spend your barter dollars to offset cash expenses.
Be sure to get an idea of what kind of demand there is for your product within the network as well as what sorts of products and services you will be able to purchase with your trade dollars before investing in joining a barter exchange. Also, ensure the exchange you join places great importance on members upholding high business ethics.
Businesses in the Seattle, Washington and San Francisco Bay Area, California markets should look into joining BizX. Those outside our markets can find reputable exchanges through Barternews.com and IRTA.com, the International Reciprocal Trade Association.
November 21, 2008 1:32 PMThank you for this exceptional article about barter and barter exchanges, which provides very good information for companies looking to enhance sales and find new markets and customers for their excess products, capacity or production.
Restaurant owners can trade empty tables, hotels can trade empty rooms, airlines can trade empty seats, lawyers, doctors and professionals can trade their excess time. And these businesses and professionals can all turn these perishable "todays" inventories that cannot be sold tomorrow into new sales that they normally would never have had. They can then use the barter dollars earned from the proceeds of these new sales to offset cash operating or capital expenses, or to enhance their lifestyle.
There is also an entire other side of barter, that being starting a barter exchange as a business. In today's economy, there are so many people, brokers and professionals that lost their job or who are looking for a new more exciting or more profitable career. Starting a barter exchange in today's market is better, easier and more profitable than ever. With just 150 members, independent barter exchange owners can typically generate more than $90,000 cash a year in fees. An average exchange of 500 members will typically generate over $300,000 annually! Plus they can earn an additional $100,000+ a year in trade to offset expenses or enhance their quality of life.
People interested in starting their own barter exchange business or just wanting to learn more about the barter industry, barter exchanges, barter software, how to start a barter exchange, or how to barter in general, can get a wealth of information at the BarterPro Blog at www.barterpro.wordpress.com.
