The following guest post is by Anthony Donnelly.
The earliest documented records of civilizations bartering dates back over 9000 years to the Egyptians, but it is certain that Man bartered long before that. Barter is the oldest form of commerce and is still going strong, in fact with the recession strengthening more and more business owners are turning to organized barter to bolster their businesses.
It is a very simple concept – quite likely the major reason for its longevity and continued success. Barter is the exchange of goods and services for other goods and services. In essence a cashless transaction. An example is a restaurant that needs landscaping. The landscaping company does some work for the restaurant in exchange for some gift certificates. But what happens when the job is quite large and the landscape company does not want that many restaurant gift certificates, or none at all? Enter the barter exchange.
Barter companies have been around since the mid-50s in America and it is estimated that there are probably over 1400 exchanges of differing sizes and scope now in the US. Just type “barter exchange” into any Internet search engine and you will be inundated with a myriad of companies to chose from. A barter exchange steps into the one-on-one relationship that exists with traditional bartering, basically allowing businesses to trade with other businesses they have nothing in common with (or where no duality of needs exists). Take the earlier example of the landscape company. If they belonged to a reputable barter exchange they would get barter credits (usually known as barter dollars) for doing the work for the restaurant, but they could then spend that barter revenue on renting a backhoe, or getting tires for their trucks, or something equally useful to their business.
There are multiple reasons to belong to a good barter exchange, below are a few key benefits:
- Increased revenue
- More clients
- Better cash flow
- Improved efficiency
- Greater marketing opportunities
- Increased purchasing power
Unless a business has more work than it can handle, barter is a ‘no-brainer’ for any company. A business has all its fixed costs (rent, salaries, insurance, vehicles, machinery, etc.) whether it has one hundred customers or three hundred, if a business can take dead time or inventory that in effect is costing money and turn it into new revenue, it’s a home run. The major benefit to companies is that they get to leverage their cost of goods. Back to the landscape company, what does it really cost them to do $1000 worth of work for the restaurant? Obviously less that $1000 or they wouldn’t be in business long (usually a company’s cost of goods is 50% or less). Since barter work is absorbing their surplus time, inventory or capacity, when they barter their services they are only incurring their actual cost of goods, this means they can make purchases via the exchange for pennies on the dollar – another home run.
Organized barter companies (usually those with national scope) also have many more benefits over conventional advertising methods since they are much more proactive. Barter members call into the exchange brokerage with things they need and the brokers match those needs with other members that can fill them. There are usually fees to join, but compared to a print advertisement for example, you only pay to join once and then most exchanges are ‘pay per use’. If at all possible, when choosing a good barter company, go with one that does not encourage cash-barter blends (i.e., a portion of the transaction is cash – not strictly all barter) and join a company that insists on ‘100% trade, 100% of the time’. Any barter company that allows blends to happen usually has inflation in their economy and not too many hard goods as a consequence.
One final tip when choosing a good barter exchange, make sure they allow you to spend first – this ensures you that their barter dollars actually have tangible worth and you’ll be able to continue spending them on a long term basis. Extra revenue is fine, but if you cannot spend it, it’s as good as worthless – unfortunately some businesses have been badly hurt by less reputable barter companies this way. Most quality barter companies will actually offer a guarantee to new members that they will let you spend a barter credit balance first and get you new business. Barter is a lot of fun and with the right company can be one of the most useful business tools you ever employ.
As far as tax goes, the IRS considers all barter transactions whether directly or via an exchange exactly the same as cash revenue. Consult your tax adviser for more detailed information on how to report barter income.
Photo by subflux.