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With the ups and downs in the economy, cash-poor detail businesses can use barter as a way to expand. Barter is the cashless interchange of goods or services and has long been used in international trade to overcome currency restrictions or foreign-exchange shortages in many countries.
Pepsi-Cola started doing business with the Soviet Union in the early 1970s. The company swapped their soft-drink concentrate for Stolichnaya vodka because the Soviets didn’t have the hard currency necessary to buy foreign products.
When I was in the carwash business, a Japanese trading company negotiated a deal where our company sold the Japanese two carwashes and they traded them to the Soviet Union for Russian coal.
Trading is an age-old concept brought up to date with computer technology, which barter exchanges rely on to track the thousands of transactions they handle. Of late, small businesses are trading their products and services for everything from legal advice to carpet installation. It’s like spending play money in the real world.
According to industry publications, more than 175,000 small companies do business on barter exchanges every year. The same publications estimate the value of annual domestic trades through barter to be over $1 billion and claim that trade volume is increasing by about 15 percent each year.
Who should barter?
For a business like detailing, barter typically provides a cashless method of obtaining badly needed goods or services. Trading is most advantageous for those concerned with high-fixed costs and spare capacity. Businesses with low profit margins or a high cost of goods sold should be cautious about trading. However, if a detailer uses discretion, he can benefit from barter.
In sluggish times, barter can benefit detail operations, allowing them to keep production up so workers don’t sit idle.
Barter can also help you expand without needing excess cash. You can trade detail service for equipment and services needed to grow your business. You should always try to barter first, and if you don’t get any takers, then go to a bank and try to get a loan.
For detail businesses, the best option is to join an exchange, which helps avoid the problems that can occur in direct trades. For example, by using a system of debits and credits, exchanges eliminate problems that can arise when trading partners don’t want to barter items of exactly the same value at exactly the same time.
Exchange members work with an account executive, who helps them locate goods or services. Members accumulate credits in the exchange. The credits are then used to purchase goods or services from other members. The exchange takes a 10 percent commission on the deal.
Exchanges treat trades like retail cash transactions and file 1099B tax forms on them. For accounting and tax purposes, barter credits earned by a company are revenue, just as cash receipts are. Credits used for business expenses are tax deductible.
When I owned detail shops, we accumulated over $15,000 in barter dollars I was able to use for services, travel and other business and personal items. For example, I used barter dollars to pay for the photographer at my daughter’s wedding.
Types of exchange
Some barter exchanges are networks of small, independent organizations linked across the country, and others are single entities with offices in several cities. Both types offer a similar range of goods and services. Although most exchanges claim that their trades are conducted on a 100 percent barter basis, those who buy and sell on exchanges say most transactions are also available on a part-cash/part-barter basis.
How exchanges provide marketing
With barter, firms don’t have to spend marketing dollars to bring in new customers. Companies that are members of an exchange become known to all others in the organization. An exchange can get you customers right away.
Evaluating an exchange
In the early 1980s, any firm with a computer could form an exchange, and unfortunately many did. In an unscrupulous form of deficit spending, some exchanges created trade credits for themselves and used them to buy goods and services from members. Several exchanges went out of business, leaving their members stuck with the losses.
Today, there are a total of 450 exchanges in the United States. The International Reciprocal Trade Association (Great Falls, VA; 703-759-1473) can provide prospective members credit and reference information on its exchanges. The National Association of Trade Exchanges (Chicago, IL; 800-733-6283) has 45 members on which it can provide data.
Reputable exchanges publish directories and newsletters promoting members’ firms. When talking with an exchange, the very first thing you should demand is the membership directory. Then talk to members to see if they always get good service.
A word to the wise
Barter is not an end-all. You should be wary of joining exchanges that don’t offer services or goods you need. Owners should carefully peruse an exchange’s membership list before joining.
In addition, you can get into trouble if you accumulate too many barter dollars, racking up thousands of dollars in trade credits and have difficulty spending them. The experts estimate that the amount of credit outstanding should equal no more than 10 percent of gross sales.
Too much barter also slows cash flow. And if the exchange were to go out of business, you would not be able to redeem your credits. You should budget barter expenditures just as you do transactions in other facets of your business.
Another perennial problem among exchanges is the tendency of members to charge higher barter prices than cash prices. Exchanges should monitor the prices members set, but often firms haggle over prices. It’s prudent to obtain estimates from nonbarter companies to insure prices on the exchange are not inflated.
For many detail businesses, the potential rewards of barter are going to outweigh the risks. When approached carefully, barter is a good business builder.