LETS TRADE!
The Ancient Practice of Bartering Gets a Modern Twist
By Steven Van Yoder, the Costco Connection – July 2004
When I prepared to publish my book last year, I wondered how I could finance the project without draining my bank account. I knew I would need editing services, a graphic designer, promotional materials and a new Web site. But instead of reaching for my checkbook, I turned to a barter exchange to help me get my project off the ground.
Through this exchange, I secured an editor for my 280 page manuscript and a printer to create new letterhead and business cards. I also traded for a new Web site. In fact, I managed to barter more than half of the required costs to publish Get Slightly Famous: Become a Celebrity in Your Field and Attract More Business with Less Effort (Bay Tree, 2003).
Bartering – the cashless trading of goods and services – is the most ancient form of commerce. Today, many contemporary businesses are taking a second look at barter as a great way to improve cash flow and enjoy higher profits. You, too, can put barter to work for your business. All that’s required is to revisit an idea as old as civilization itself.
Trading In A Cash World
While our ancestors might have traded chickens for horseshoes, today’s savvy entrepreneurs swap hotel rooms for printing, office space for a night on the town and dental work for vacations in the Caribbean, all with the help of business barter exchanges.
Barter exchanges link businesses together into trading networks where members trade with one another to turn their underutilized capacity into new revenue streams. Instead of cash, barter exchanges issue “barter credits” or “trade dollars” that are used like cash between exchange members. For a small cash commission (typically 10 to 15 percent of each transaction), these exchanges facilitate the trades and provide monthly transaction statements.
For example, the owner of a sign-painting company needs to have brochures printed. Instead of paying with cash, he goes to a printer within his barter exchange and pays with trade dollars. Subsequently, the printer can spend his barter credits with any other business in the exchange. He may, in fact, decide to eat out at a restaurant, seek legal advice for his business or defray his monthly courier expense. He does not have to spend them with the sign painter.
When I first joined a barter exchange, I was introduced to a new world that had been beneath my nose all along but that I had been oblivious to. The exchange comprised many local businesses, some of which I was already doing business with, from restaurants to dentists to moving companies. I was immediately plugged into an efficient system that made trading easy – a barter exchange representative helped to work deals and serve my buying needs.
Membership has its Benefits
When you join a barter exchange, expect to pay an initiation fee (typically $100 to $500), annual dues and a 10 to 15 percent commission on every trade. In return, the exchange will provide ongoing account maintenance, a monthly statement, checks or debit cards and a membership directory. Some provide a line of credit to let you start trading right away.
Once you are a member, barter is a valuable tool to bring in new clients and customers because trade customers come in addition to existing cash customers. “When someone joins an exchange, they’re exposed to thousands of potential clients,” says Tom McDowell, former director of the National Association of Trade Exchanges. “All of barter’s benefits exist because members get new customers they did not have before.”
Bartering can also help offset normal expenses and keep more cash in the bank. Through cash conservation (shifting existing cash expenses to trade), business owners can keep more of their “green dollars” in the bank by using trade to cover fixed costs, such as plumbing, accounting, and even office rental.
Making Barter Pay
Before joining a barter exchange you must know your ‘cost of trade’, or the real cash outlay involved in each barter transaction. A hotel, for example, has a low cost of trade because it costs little to barter an empty room. A printer, however, must consider paper costs. Barter is particularly effective for service oriented companies that have few or no out-of-pocket expenses. Beware of cash heavy transactions requiring outlays for overhead or equipment. It’s also necessary to factor in cash fees charged by the exchange. And barter should supplement, not compromise, your cash business. Despite its appeal, you can’t pay telephone bills or taxes with trade.
To make barter work for your business, flexibility is crucial, which often means switching from established vendors to those within the barter exchange. For example, you may need a computer or other piece of equipment. If you have the cash, you go to the store and buy it. With barter, you sometimes have to work with your broker to find what you need, and you may need to have it shipped.
The Internal Revenue Service considers barter income the same as cash for tax purposes. Barter exchanges issue 1099-B forms to members and the IRS at the end of a tax year. With this in mind, it is advisable to treat barter the same as cash and to use trade for tax-deductible expenses whenever possible.
There are two national clearinghouses for barter exchanges: the National Association of Trade Exchanges, at www.nate.org; and the International Reciprocal Trade Association at www.irta.com. Either can provide a list of exchanges in your area.
In the end, the benefits of bartering are limited only by your creativity. As business becomes more competitive, the concept of trading promises to become more popular. Small-business owners are discovering that bartering can become an integral component of their business plans, enabling them to see higher profits, meet like-minded business contacts and improve the quality of their business and personal lives.
Things to Consider For Successful Barter
- Compare services and fees of barter exchanges in your community. Check member listing before joining to ensure the exchange can fill your needs.
- Determine how much advertising and promotion the exchange does for members.
- Get a list of the exchange’s members who are currently active and not on standby or hold status.
- Ask members if they are satisfied with the exchange. Ask them to discuss the pros and cons of doing business with the exchange.
- Contact the usual business reference sources in your area (Better Business Bureau, Chamber of Commerce, etc.).
- Ask if an individual representative will be assigned to your account (this is very useful in having your needs attended to).
- Ask whether the exchange issues a line of credit.
BARTERING
A NEW USE OF AN OLD CONCEPT
Denise Kalette, USA Today – Money
Small businesses by the thousands are turning to an ancient way of trade to beat the recession blues: bartering. “We traded a submarine once,” said Barter Exchange President Matthew O’Hayer from Cancun, Mexico, where he was staying in a hotel room he got through a barter.
The number of firms joining trade exchanges is rocketing as the slow economy leaves merchants with stockpiles of unsold goods and little cash for supplies. Creative entrepreneurs quietly have made bartering a $6 billion (annual value of trades) industry as they trade inventory and services. In a mega version of Let’s Make a Deal, entrepreneurs are trading away unsold hotel rooms and airline seats, unrented cars and unoccupied restaurant tables.
The dollar value of the industry’s trades is “growing faster than the rate of the GNP – about 8% annually” exults Paul Suplizio, executive director of the International Reciprocal Trade Association of Alexandria, VA.
“People want to conserve cash as much as possible during hard times.” Says Al Kafka, chairman of BarterMax Inc. in Sharon, MA. Bartering allows companies to get full price for unsold merchandise by selling it for trade dollars to an exchange, where other clients buy it with their trade dollars.
Here are some examples:
- Barter Exchange Inc. based in Austin, TX, traded 600,000 napkin rings and a Cherokee airplane. This year it traded a 60 foot yacht in Los Angeles, says O’Hayer.
- We’ve done complete weddings on trade”, says Kafka. “We’ve done catering, limousines, invitations, hotel rooms, flowers. “ Six months ago, 500 people celebrated aboard the tourist boat Spirit of Boston, courtesy of a bartered transaction.
- Some golfers are bartering for memberships at Texas Country Clubs and paying green fees and pro shop costs on the barter plan. Some barter groups offer golf packages.
- A Japanese group bartered 1,250 computer printers in New Jersey.
- A Chicago-based art gallery gave BarterMax $200,000 worth of art. The exchange placed $200,000 worth of advertising for the gallery in hotel rooms across the county. The advertising company in turn is free to select office furniture or replenish its supplies through barter clients.
- Barterers with a sweet tooth can get a slice of Izzy’s cheesecake from Izzy’s shop in Sharon, MA.
HOTEL BARTER ROOMS
For Advertising Space
David Frabotta, Hotel & Motel Management
National Report – Most properties are reducing as many expenses as possible to battle the low occupancies that are projected to continue into next year. While it might be difficult to remain in the public eye in markets where cash flow has slowed to a trickle, hotels might have an opportunity to save precious dollars by trading unused guestrooms for advertising space.
“There is more of an opportunity now than ever before,” said Phil Goodman, president of Western Media Corp., which implements barter programs for hotels. “Hoteliers that keep a media presence out there are going to have a leading edge over their competitors when we come out of this.”
Although properties can barter goods and services, nothing is more effective or valuable than trading rooms for print or broadcast advertising space because it supports cash strategies, Goodman said.
But as with any other marketing initiative, a barter program requires strategic planning, precise implementation and monitoring. “Too many people don’t take barter seriously, especially during the past seven years with the economy being so good,” Goodman said. “But when you do your barter, you really need to have the methodology, the interpretation of it and the application of it.”
Getting Started
Although bartering with radio stations, newspapers and magazines requires less cash than paying for advertising, it’s not free. A budget is required to draft a media strategy, which should be a wish-list media campaign as if planning for a well-funded ad strategy, said Greg Robinson, Vice President of Sales Operations for Starwood Hotels & Resorts Worldwide. “ We develop the media plan as the first step in the process, and we will only do a deal if the media plan is agreed to,” he said, “ We don’t do front-end deals in which we go out and cut the deal and then go out and try to make it work.”
A media plan based on barter takes as much work and cash on the front end as a cash campaign to be effective, said Ed Schwitzky, director of sales & marketing for Westin La Paloma Resort and Spa in Phoenix. The savings come in the media-guestroom swap.
“You have to know your customer and business,” Schwitzky said. “If you are advertising to the wrong segment or customer base, then you are probably going to blame it on barter or the program or the lack of a program instead of an inept or not completely thought-through marketing strategy.”
A property should begin developing a program about six months ahead of time, three months to devise a media strategy and three to negotiate with media companies and set up an accounting system for the reservations department, front desk and accountant department, Robinson said.
“There is nothing more embarrassing than having a customer come in at 9:30 at night claiming they have had a barter reservation, and your front-desk clerk doesn’t know what to do with it,” he said.
VALUE
The accounting system is important at tax time because there should be a disparity between the value assigned to the guestrooms in trade and how it is written down on a profit and loss statement. A hotel should assign a rack-rate value to its traded guestrooms, but it should account for them as average daily rate or less, Goodman said.
“Controllers need to rethink their mindset and strategy about the accountability of barter, because if you are going to spend it like cash, then it’s not worth it to trade,” he said. “There is no federal law that says you have to account for it at full rack rate. It is fair market value, so the controllers either have to take the ADR or the actual cost of the room. If they don’t do that at that level, then they are taking the value away and shooting themselves in the foot”.
A hotel should barter its rooms at full rack rate, just as media companies likely will charge hotels full rate card for its advertising trade.
“The station confirms our schedule off its rate card,” Schwitzy said. “We charge them when they come in to redeem goods and services off of our rate card. They are liquidating spots that didn’t cost them what they are charging us, and they are redeeming product that didn’t cost us what we are charging them.”
It most likely would do a property little good to have its radio ad run at midnight on a Sunday, so the negotiations, contract formulation, education, accounting and monitoring, is most effective when done by a professional barter company that knows the media as well as hospitality, Goodman said.
IT’S SMARTER TO BARTER
Inc.com – The Resources For Growing Companies
Madhu Sethi, founder and former owner of Innovation Computers, a computer dealer, in Deerfield Beach, FL, took an innovative approach to handling a collection problem and gained unexpected benefits. One of the firms he dealt with each month owed him $80,000, but it was experiencing a cash crunch and couldn’t afford to pay. So, the owner proposed giving him $150,000 worth of credits through a barter service. Sethi didn’t even know what bartering was all about. “It was that or nothing,” he explained. “Although I was disgruntled, I agreed to the deal.”
Sethi admitted that agreement was one of the best business decisions he ever made. He held on to the business relationship, collected what might otherwise have been an uncollectible debt, and was able, meanwhile, to use that barter credit to advertise in several magazines that he normally would never have tried. Eventually, Sethi became an active member in a barter network, in part because there were several occasions when customers couldn’t afford to pay their bills.