Bartering

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Bartering

Bartering is the exchange of goods and services among businesses. The practice is as old as time, but since about the late 1970s it has taken on a new life of its own and has grown into a major national and international activity, more recently mediated by means of the Internet. Bartering organizations and networks have come into being. In what amounts to a revival of mediaeval practices, these organizations have created and maintained new forms of money in the form of "trading credits." Trading profits are taxable; in turn, also, trading costs are deductible from taxes like any other costs. The principal justification of barter trading is three-fold: barter exchanges offer new ways of finding markets, new ways of obtaining goods at lower costs, and barter lowers participating companies' cash-flow requirements. The last of these justifications usually acts as the driving force.

The International Reciprocal Trade Association (IRTA) reports World Trade Organization figures to the effect that 15 percent of international trade is now conducted on a non-cash basis. In North and Latin America, some 500 commercial trade exchange companies operated and accounted for $2.3 billion in barter trade in 2004, the most recent data. IRTA's own survey indicates a world market of $8.25 billion in 2004. IRTA is one of the leading associations of companies engaged in barter trade; the National Association of Trade Exchanges is another.

BARTERING BASICS

Traditional bartering took the form of simple exchanges: I mow your lawn, you cut my hair. Modern bartering is much more complex. A company wishing to barter first joins a trading exchange. Sign-up fees ranging from $200 to $600 and monthly membership costs are usually involved. A broker may be assigned to the company. The goods or services to be bartered are priced by negotiation. In exchange for these the company receives trading credits. These credits work exactly like money but must be exchanged for goods/services available through the exchange the company has joined or other exchanges with which that exchange is affiliated. Each transaction has its own costs (10 to 15 percent of the transaction's face value)—in addition to the assessed membership fees. Bartering exchanges, in effect, "make a new market" and also maintain a "currency" (the trading credits) to be used within that market.

Tina Traster, writing in Crain's New York Business provides some valuable tips for those wishing to participate. She points out that barter transactions take more time; those in a hurry had better use cash. It is best to investigate, in advance, if the exchange has what the would-be participant needs. She reminds the would-be trader that taxes are due on all barter exchanges and the exchange will report them to the IRS on Form 1099B. She suggests that bartering is potentially a way of networking with new customers and should not be viewed as a one-time transaction.

Joanne Sammer, writing in the New Jersey Law Journal, shows the manner in which a small business used barter to get going. The story involves a two-lawyer startup. The new law-firm's principal joined two barter exchanges to kick-start the business. Sammer quotes the principal as saying: "As a small firm, we needed opportunities to find clients we ordinarily would not get." The law-firm encounters 20 potential barter clients yearly. Many of these contacts eventually become cash-paying clients and also refer other paying customers.

TRENDS AND DIRECTIONS

Web-based barter trading appears to be the next major development in the barter industry. As Gabriel Landriault put it in a 1999 article in Computer Dealer News, "Internet-based barter exchanges are growing in popularity and could represent the last true e-commerce revolution." New entities are announced at regular intervals and have features designed to increase participation—lower or no fees and a huge variety of difficult-to-find products (on the model of e-Bay). Established "brick and mortar" operations (which have warehouses, brokers, and usually charge substantial fees) as well as established e-traders are carefully watching development now. Landriault reported that consolidation was both anticipated and resisted by many of those involved.

The barter business appears above all to depend on participants who are low on cash and using barter as a way to get around these problems. This fact is hinted at by IRTA's own web site. On IRTA's page titled Joining an Exchange (see http://www.irta.com) the first bulleted item reads as follows: "First things first, make sure that your business is stable with cash flow. If your business is already experiencing cash flow problems, don't assume that barter is going to solve them." If cash problems are the driving force, the ultimate expansion of this business will be indirectly governed by economic conditions—unless other factors, such as networking and finding new clients, come to trump the primary motive for participation.

EVALUATING BARTER NETWORKS

Small businesses interested in exploring membership in a local, national, or international barter exchange should consider the following factors when examining networks:

Examine the roster of network participants/members to ensure that they have goods and/or services of value to your small business.
Study the number of members and the frequency with which they trade. Some exchanges are much more active than others, depending on the trading philosophy of participants and the rules of the network itself.
Examine the attractiveness of ancillary network services (consulting, member mixers, information newsletters, etc.) for your company.
Study the size of the trades made within the network. Companies that are interested primarily in bartering expensive goods or services may find it difficult to find parties willing to engage in a barter agreement.
Compare pricing structure and other financial aspects of the network to ensure that bartering makes financial sense for your business. Origination, monthly, and transaction fees can all vary significantly from network to network. In addition, entrepreneurs should attempt to gauge the level of sincere interest that the exchange has in helping their business. For example, some bartering networks limit the number of businesses offering the same goods or services so that benefits of membership are not diluted among too many companies.
Study the geographic location of other businesses within the barter exchange. For some businesses, close proximity to other network participants is essential for membership to be financially viable.