Feb 1996 KIPLINGER'S PERSONAL FINANCE MAGAZINE

How Bartering Saves Cash

Here’s the deal: You paint my office, I’ll print your brochures. Thousands of businesses have made this sort of swap a billion-dollar enterprise.

When Jerry Trombo moved his printing company to a new building in Bedford Heights, Ohio, he didn’t pay the movers a dime…in cash. He paid with printing services. Then he traded printing for painting, carpeting, furniture, a new computer system, a stereo, the clock on his desk and new pavement for the driveway.

All in all, Litho Graphics did more than $50,000 worth of bartering in 1995, meaning that about 8% of its total sales weren’t sales, in the normal sense; they were trades.

"I don’t buy anything unless I pick up the barter catalog first," says Trombo, who has been bartering through the American Trade Exchange, in Cleveland, Ohio, for about 14 years. Voicing a sentiment shared by most small-business owners, Trombo adds, "I’ll do anything to avoid spending cash."

Thanks to today’s technology, business-to-business barter is booming. In the newest incarnation of an age-old technique, companies aggressively trade goods and services through computerized barter exchanges. Though a vast amount of one-on-one barter still goes on, such deals are, by their nature, limited. After all, a mover can only use so many printed fliers in a year, and a printer rarely moves.

That’s where barter companies like the American Trade Exchange, come in. Members build up accounts of "trade dollars" (sometimes called barter dollars) by "selling" to other businesses participating in the network. Members then spend what they’ve earned on any combination of products and services offered by other members. So a mover can use some trade dollars on fliers, if he wishes, and some on parts and service for his trucks. Or he can choose among the thousands of other items in the system: anything from furniture and printing supplies to travel and trash removal-even the services of doctors, lawyers and accountants.

Last year 250,000 companies traded an estimated $1.8 billion worth of goods and services through more than 400 barter networks, according to the National Association of Trade Exchanges (NATE), the industry association. Bartering among small businesses has been growing at a swift 10% or more per year since the early 1980’s, according to NATE.

Easing The Cash-Flow Squeeze
Think of barter as a supplement to your regular cash business, not a replacement for it. For most businesses, producing 6-8% of sales per year by barter is a reasonable ceiling. Some firms do much more, though. For instance a florist in Illinois, does about one-third of his $300,000 annual business in barter. Trade dollars he earns by bartering flowers buy things he otherwise would have used cash for, such as printing, office equipment, vehicle maintenance, shelving-even baskets, plants and flowers to supply his inventory. Because his barter exchange has ties to other networks, through its membership in NATE, he’s opened the door for new customers in distant locations such as Hawaii, Los Angeles and New York City.

His experience illustrates one of the key reasons to barter: It eases the squeeze on cash flow that often plagues small businesses. "It also give our clients a Competitive Edge," says Jack Schacht, president of Illinois Trade Association. Barter-network members tend to shop within the system first and satisfied barter customers make referrals to cash customers.

There are other advantages: You can move excess inventory and fill unused production time. Hotels barter rooms and airlines trade seats that would otherwise go unused. Jerry Trombo really appreciates barter jobs when his cash business is slow, so extra printing capacity isn’t wasted. "Barter is a win-win situation," he says.

Small businesses often find it easier to obtain credit through an exchange than through a bank. Though exchanges may require applicants to supply credit reports and collateral, they tend to evaluate businesses differently than banks do, focusing on prospects for selling within the network. Business owners can also use trade dollars as incentives and benefits for employees. A growing number of small businesses that can’t afford a health plan, for example, are arranging trades with doctors who are exchange members to provide services to employees.
HOW IT WORKS:
When you become a member, the barter company advertises your product or service to other members. Members can approach each other directly, but the better exchanges offer "trade brokers" as matchmakers. After making introductions, though, the exchange usually bows out. Negotiating details of the deal is the responsibility of the members, just as if it were a cash transaction.

Most exchanges use a credit-debit system to keep track of both sides of a trade. Generally, if you are not satisfied with what you have bought, you work it out with the seller, just as you would if it were a cash sale. But some barter companies will try to mediate disputes as a last resort.

Bartering conserves cash, but it isn’t free. Most exchanges charge a fee to join-typically $200 - $600 and some have an annual renewal fee. There’s also likely to be a monthly maintenance fee of $10 to $15, and a charge of 10% to 15% on the value of each transaction. The last cost is sometimes split between the buyer and the seller. In most cases the fees are paid in cash, but some exchanges accept trade dollars for part of the amount due. A monthly statement shows account activity and fees. Any sales taxes on a transaction are paid in cash by the buyer, as are tips on, say, restaurant meals.

DON’T GO BARTER CRAZY:
Remember that every time you trade you are taking inventory off the shelves or committing production time. Unless you have enough cash coming in to replace your inventory and to cover you normally pay in cash-such as rent, insurance, utilities and payroll-going barter-crazy can hurt your business. Start-ups, which are often thinly capitalized and lack solid cash-customer bases should work closely with their trade broker to protect their cash flow. Don’t spend the company’s trade dollars on personal items, such as travel, evenings out, clothes and vehicles, at least until you’ve put a substantial amount of your trade, back into your business.

Some exchange clients have used trade dollars for jewelry, exotic cars, even the down payment on a house. But get comfortable with how to use trade, and know the cost of every barter deal.

SPOTTING A GOOD TRADE EXCHANGE:
There may be several exchanges in your area. Check the Yellow Pages under "Barter and Trade Exchanges." Or contact the National Association of Trade Exchanges (NATE) 27801 Euclid Avenue Suite 610, Euclid, Ohio 44132, for a free list. (Send a self-addressed stamped envelope).

The barter-exchange industry is largely self-regulated. Members of NATE agree to follow the association’s code of ethics. When evaluating an exchange, check its reputation with the Better Business Bureau, the Chamber of Commerce and any consumer-protection agency where the exchange is headquartered, or where your local office is located. Contact NATE for any information they may have. (Remember in barter, being "National or Bigger" doesn’t necessarily mean better). Also, ask the following questions: Does the exchange offer a broad range of products and services? Though reciprocal trades do occur frequently, most trades are still local, so study the list of members carefully. A reputable exchange should be willing to make its list available.

The key to successful bartering is knowing how to use the system. Learn to be flexible in your buying habits. Give your trade broker time to find what you want, and be willing to help by giving referrals.

Check what’s available through the exchange that can enhance your business. Then see how many members need what you are selling. Look for balance. Are members satisfied? Get the lowdown from a number of current and former members. Be careful of an exchange where members charge "part-cash" (below an amount specified by the exchange) that usually indicates a weak exchange, and an inability of clients to get what they want and need. Does the exchange office appear to be run professionally? Barter is a business and the exchanges office should be run like a business. NATE Executive Director, Tom McDowell, warns businesses to beware of "truck traders and basement operators." "They come and go like the seasons," says McDowell. In a professional exchange your broker will help you learn how to barter and keep track of how you are doing. They’ll be looking out for your best interest. Does the barter company sponsor promotional activities? These may include newsletters, fax flashes, trade fairs or auctions as well as networking lunches or breakfasts.

UNCLE SAM’S INTEREST:
There is no tax advantage, or disadvantage to bartering. Cash sales and trade sales are treated identically under the tax law. Trade dollars are considered income in the year they are credited to your account, regardless of when you use them. Exchanges report barter transactions to the Internal Revenue Service (and to you) on Form 1099-B at the end of the year.

If you use trade dollars on products and services for your business, including salaries, the amounts are deductible business expenses. And keep track of trade dollars spent on personal items. That’s extra compensation to you – deductible for the business but taxable on your personal return