BARTERING

Bartering is the exchange of goods and services among businesses. This practice may be undertaken by single businesses, but in recent years many companies that choose to barter have joined organized bartering networks that offer memberships to firms in a variety of industries.

The popularity of bartering has surged over the past several years. Indeed, after making its first appearance in the modern U.S. economy in the late 1970s, its modest rate of growth suddenly accelerated in the late 1980s and early 1990s. By 1996 it was estimated that North American companies were bartering approximately $7.6 billion on an annual basis. The International Reciprocal Trade Association (IRTA) reports that the majority of this economic activity takes place within organized barter exchanges. According to the IRTA, the number of trade exchanges grew from under 200 in 1974 to more than 1,500 by 1998. During that same period, the IRTA estimates that the total value of goods and services traded by those exchanges rose from $45 million to over $1.5 billion.

Both large and small companies have contributed to this growth. Companies of all sizes have been attracted to its capacity for putting excess inventory and resources to good use, while small businesses in particular have embraced its usefulness as a viable cash alternative to cover basic expenditures in such areas as business travel, facility maintenance and/or improvements, marketing, and a whole host of other areas. "When it's properly done," one entrepreneur told Small Business Reports, "barter gives smaller businesses the clout of a much larger company."

Participating companies should be aware, however, that barter income is treated like regular income by the IRS. Companies that engage in bartering are expected to pay both sales tax and income tax on the goods and services they buy and sell (bartered goods and services are taxable in the year that they are credited). Of course, this status also means that bartering activity is tax-deductible for business expenses. But Office Systems 98 contributor Jean Buchanan urges small business owners to "consult with your tax advisor before trading business resources for personal services, such as massage or pet grooming services. You need to watch the implications to your personal income tax and potential mixed use of corporate funds."

ORGANIZED BARTERING NETWORKS

Barter networks or exchanges have emerged as a valuable tool for many businesses in recent years. Under these arrangements, member companies list goods and/or services that they are willing to make available for trade. When these goods or services are purchased by another company, the selling business receives trade credit based on the dollar value of the product or service offered. A business subsequently uses its trade credits to purchase goods or services offered by other members. "The exchange helps promote members' products and services through brokers (who act as an outside sales force for members), publications such as a barter directory and monthly classified ads listing specific items that client have to sell," added Small Business Reports contributor Susan Groenwald. "Many barter networks also have reciprocal agreements with networks in other cities, allowing members to trade with even more businesses."

Most observers agree that these networks can provide small business owners with potentially valuable options when it comes time to 1) pay debts during "cash-crunch" periods, and 2) collect from clients who are undergoing their own financial difficulties. But practitioners also contend that it helps a company's bottom line even when everybody's financial situation is stable.

JOINING A NETWORK Since organized bartering networks conduct a variety of administrative and record-keeping tasks on behalf of their members, they require businesses to pay for their membership. These costs can take a variety of forms, including commissions on completed barters (often 10 to 15 percent of the value of each transaction), one-time fees, annual fees (some networks charge no annual fee, while others may charge several hundred dollars), maintenance fees, or some combination thereof. Entrepreneurs who are intrigued with the idea of joining a bartering network, however, should be aware that pursuing such a course of action is likely to be a waste of time if his or her company is on shaky financial ground or less than committed to providing top services or goods. Some networks will reject applicants whose solvency is in question, and even companies that are accepted should anticipate close monitoring during their first few transactions. "We watch the first couple of trades very carefully," one bartering broker told San Diego Business Journal. "The newer the members, the closer we watch them." Some networks also assign established members to serve as mentors of sorts for new members.

NETWORKING WITHIN THE NETWORK "Bartering through an organized network is inherently more flexible than using cash because the network facilitates trade transactions among all its business members," stated Groenwald. Indeed, these networks are devoted to keeping members in touch with one another and facilitating transactions for the simple reason that they are reliant on trades for their very existence. Many networks are adept at keeping the lines of communication—and thus the lines of bartering—open between their members. In addition to directories, newsletters, and the like, many networks sponsor membership gatherings in which representatives from various businesses can meet and talk. These "mixers" enable small business owners to establish valuable contacts and, in many cases, make transactions that benefit both themselves and other network members. "For weeks after [mixers], the vouchers triple," one network executive told San Diego Business Journal. "Deals are being done." Members of the barter network community also note that these face-to-face encounters tend to keep businesses focused on ensuring that they uphold their end of the bargain in barter agreements. A network member who provides substandard service to a fellow member will find that negative publicity can travel quickly in mixer settings.

In addition to serving as a facilitator of bartering transactions, barter networks usually provide a range of ancillary services to their members. In addition to providing recordkeeping on all transactions that go through the organization, most networks will provide regular statements (monthly, quarterly, annual) to members and provide them with necessary tax forms and information.

ADVANTAGES AND DISADVANTAGES OF BARTERING

Bartering has been hailed as a potentially valuable new addition to the strategic arsenal of small business owners for several reasons. Major advantages of barter exchanges include the following:

Employee compensation—Small business enterprises are often strapped for cash when it comes to providing bonuses or perks to their employees, but barter exchanges are a potential avenue for companies that want to reward their workforce in some way. For example, some companies have established system within barter network so that employees can choose rewards from the offerings of other exchange members (within certain financial limits, of course). Under these arrangements, business owners set up "subaccounts" for individual employees to which barter credits owned by the business can be transferred. Employees thus have the opportunity to spend those credits anywhere in the exchange as they see fit.

Make use of excess inventory and used equipment—Barter exchanges are often ideally suited for companies who want to unload excess inventory or old equipment (machinery, office furniture, etc.) while at the same time realizing some financial benefit. They can unload their extraneous goods and equipment in exchange for credits that can be used to procure valuable goods and services from other network members.

Business Travel—Increasing numbers of small business owners are using bartering as a way to cut down on costs associated with business travel, especially as the number of lodging facilities engaged in bartering practices continues to grow.

Debt Collection—Groenwald noted that small businesses often depend on prompt debt collection to maintain their very viability, "yet using an attorney or commercial service for collections takes both time and money, and writing off the debt is a no-win situation." Instead, she pointed out that many small business owners have begun to offer debtors the option of paying in merchandise or services, which are subsequently sold on the barter network with the credit going to the small business that would otherwise have been unable to collect anything. "In effect, the trade credits are equal to receiving the original debt in cash," wrote Groenwald. Some of this value is sacrificed to network transaction fees, but small businesses willing to use this option still receive a healthy percentage of the amount owed them.

Expand Customer Base—Barter exchanges are a potentially valuable tool for small businesses to contact and acquire new customers/clients. Many barter relationships eventually blossom into full-fledged cash business arrangements, as the companies in question develop trust and respect for one another.

Line of Credit—Bartering networks can also serve as an alternative to more traditional means of financing for small businesses. "With this financing strategy, the barter network advances a set amount of trade dollars to your company against its projected future sales," said Groenwald. "Generally, the barter network [will] determine the trade-dollar amount your company is likely to earn back in a one-year period and base the advance on that amount." In addition, Groenwald pointed out that the interest that is charged on the line of credit may be paid in trade.

Cash Savings—Barter exchanges enable small business owners to keep greater amounts of cash on reserve, an especially important consideration for new businesses.

Analysts do admit, however, that there are drawbacks associated with bartering as well. Some businesses that participate in bartering may find that the range of products or services available do not fully address their needs, or they may not be available when they are needed. Finally, as mentioned above, providing shoddy service or materials to clients or other network members will likely result in a drop in community and/or industry reputation, a development that small business owners should avoid at all costs.

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.

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