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The Barter System - Is It for You?
Whether you are starting or growing a small business, using a barter system preserves working capital to apply to your venture. Also called in-kind trade, trade-outs, counter-trades or contra agreements, this process can fund day-to-day operational expenses without cash outlay.
By definition, bartering is the exchange of goods and services for other goods or services. Research indicates that nearly one-third of U.S. small businesses use some type of bartering system (Barter News Weekly). Even so, some experts believe companies are not maximizing their own barter possibilities.
Benefits of Bartering
A barter arrangement's most obvious value is insignificant cash savings, as well as reduced financial paperwork -- but there's more. Bartering also:
When to Barter
A barter system can involve swapping big-ticket items, but many small-company owners stick with products and services required for routine operations. These include:
How It Works
The barter process, unlike a cash transaction, requires no exchange of money between trading parties. However, barter dollars are identical to real dollars at income tax-time, so owners must report the fair market value of goods received on their tax returns.
In fact, entrepreneurs should treat barter revenue like any of their other business activities, making sure to:
A barter exchange is an organization that facilitates trade between group members. Exchanges also act as banks, recording transaction values, and member-account activity.
Barter exchanges serving small and medium-sized businesses are often referred to as retail barter exchanges. By contrast, corporate barter exchanges have provided alternative channels of distribution for the goods produced by large corporations.
Traditional barter exchanges generally serve either small businesses or large corporations, but not both. This is because these exchanges are simply too small to provide a sufficient outlet for the inventory available from large corporations.
They also give unprecedented exposure to potential new customers through:
A modern business-to-business barter exchange eliminates the one-to-one limitations by making multi-party trading possible. Parties no longer have to find the exact match of needed goods and services between the buyer and seller because the exchange provides a marketplace.
The marketplace uses trade credits as the medium of exchange. Trade credits are a non-cash currency that facilitates trading. The more businesses that participate in the exchange, the more likely each will find what it wants to buy and gain new customers for its goods or services.
Trade credits make full value trading possible. Businesses exchange their products or services at full value, but generally with significantly lower variable costs. This results in increased profitability. Barter is particularly beneficial to businesses with excess goods or services, especially if those products are perishable.
When selecting an exchange, contact an industry trade association such as the International Reciprocal Trade Association for a list of member groups. Then, do some digging:
How to Establish a Trading Partnership
The most fruitful bartering partnerships typically start with an organized plan. Veteran barterers are likely to make a list of products they need but are unable or unwilling to purchase with cash. They also will identify possible trading partners. These may include business associates, existing customers and members of local exchanges. Once the lists are in place, they will:
Protecting Your Interest
While bartering can be a boon for companies on tight operational budgets, problems may arise. Here are some words of caution:
By observing a few rules, doing some homework and applying a good measure of common sense, most businesses can reap the rewards of bartering. A better cash flow, new business, and a fresh marketing path are within easy grasp.