Barter: A Strategic Tool for the New Economy
By Richard L. Cravatts
Financing a startup in this economy is challenging. Before buying anything for your startup, consider barter for things like office furniture, phone systems, and advertising, conserving precious operating cash.
The old adage "what goes around, comes around" certainly seems to have proved itself true in the case of barter, the world's oldest-and, some would say, most basic-way of doing business. Already a $16 billion annual industry prior to the coming of the Internet, a recent surge in online bartering sites promises an even more robust future for small- and medium-sized businesses wanting to conserve cash by trading products, skills, and services in the New Economy.
In the past year alone some dozen or more sites devoted to barter and trading have appeared online. Some, C2C sites such as SwapIt, WebSwap, Intellibarter, ExchangeAnything, SwitcHouse, Swap, Lassobucks, and others, create virtual "classifieds" and let individuals swap CDs, videos, and other new or used personal items they no longer want for different things they now need.
While the C2C sites are intriguing and potentially useful to consumers, they offer little or no resources for businesses wishing to buy and sell on barter on a regular basis, and within an organized 'system' offering a common trade-dollar currency, real-world accounting and statements, and a range of services and products needed to conduct business.
To address these needs, some business-to-business barter exchanges also have staked out an online presence. Today's most visible B2B barter sites are of two main types: the first is the online extension of what started as offline exchanges (Ubarter, BXIads, ITEX, BarterExpress). The others (BarterItOnline, BigVine, and BarterTrust) were created specifically as Internet barter businesses.
What the B2B exchanges enable business owners to do is turn over products and services to a second group of consumers--other business owners--willing to buy and sell without using cash.
The beauty of these trading systems, of course, is that traders can find new buyers of their products and services from the targeted universe of participants trading within a particular exchange. Instead of having to trade one-on-one, a barter exchange enables members to "shop" anywhere in the system, using trade currency, with a large number of willing buyers and sellers. A member, for instance, can sell office furniture to an advertising agency but use his credits to hire a law firm, have a website built, or pay an accountant.
Barter brokers, who monitor and record all transactions and introduce traders to each other, receive commissions for the efforts--not unlike brokers in stocks and other securities. All trades are recorded, and monthly statements (similar to charge card invoices) are provided to members indicating their purchases, sales, and current balance.
Commissions, which for traditional land-based barter exchanges range from 8 percent to 15 percent of purchases, are due after transactions occur. Sometimes, however, exchanges charge 5 percent on the sales side and 5 percent on purchases to help encourage equal buying and selling activity. Online exchanges, on the other hand, presumably because their overhead costs are consolidated and therefore lower, are able to charge lower transaction fees. At BarterItOnline, for instance, buyers are charged a transaction fee of only 4% in cash and another 4% commission paid by the buyer in trade with e-dollars.
Startup businesses can conserve precious operating cash by making purchases with their products rather than their profits, thus freeing up cash and bringing in new sources of business through the drawing power of the exchanges. When business owners "buy" products or services first by using trade dollars, they are essentially able to make purchases with interest-free credit lines. One small chain of stationary stores west of Boston, for example, was able to expand its operations and set up two new locations by trading for store fixtures, architectural design, and advertising.
Another key benefit to the entrepreneur is his or her ability to purchase such services as advertising on a barter basis and attract cash-paying customers. Additionally, joining a barter exchange-either offline or online-has the immediate and important effect of creating a new sales channel for a member business: once a business becomes part of a private "economy" using a proprietary barter currency, other businesses who may never have bought and sold from one another now are incentivized to do business with fellow exchange members, thus creating new sales channels.
BarterItOnline, for one, also recognized that New Economy startups have to make immediate, high-priority purchases and would like to pay for these initial expenses, not with a frequently inadequate supply of cash, but with what many early stage businesses do have: future value and equity. Therefore, we saw a key role in being able to act as an intermediary between companies wishing to trade their stock options and other firms that can supply those important goods and services: website designers, public relations and marketing firms, office furniture suppliers, printers, and a range of advertising and other media.
For those businesses and individuals considering barter as a technique for maximizing profits, the experts suggest some of the following tips:
Think barter before making any purchase for your business. This is especially critical for startups, when you may well be able to finance the cost of office furniture, phone systems, advertising, and the like by using trade dollars now that you won't have to replace until later, once your business is off and running.
Use barter to maximize sales by selling unused or unsold inventory at full prices. This can include: filling empty hotel rooms and airline seats; creating new sales channels by a new group of barter buyers with available trade credits to purchase from you at full prices; and providing professional skills or services to maximize billable time and reduce downtime.
Train your vendors to use barter to your own advantage. When suppliers approach you for business, try to make barter one of the contingencies of making your deal.
Buy on trade, resell for cash. Barterers frequently have the opportunity to acquire goods on trade, which can be resold to cash customers. Graphic designers, for instance, can buy typesetting or color separations on trade and bill the cost of these expenses directly to their cash-paying clients.
Avoid the temptation of earning barter credits by selling your business products or service and spending credits on personal items. Barter income derived from business sales is taxable; expenditures on personal items are not tax-deductible.
Richard L. Cravatts is CEO and Founder of BarterItOnline (http://www.barteritonline.com).