Barter: A Potential Cost Saver for Small Businesses
Small companies are turning to barter when they want to conserve cash or jump-start sales. More than 440,000 businesses in North America traded through an exchange in 1998, the latest year for which figures are available, according to the International Reciprocal Trade Association.
A barter exchange -- for those who haven't used one -- combines the functions of classified advertising and a bank. Customers sign up to sell anything from drywall to dentistry, the exchange compiles the listings in a directory, and buyers contact sellers directly or through a broker employed by the exchange. All sales are executed in trade dollars, which customers accumulate by selling their own goods and services or by borrowing from the exchange. An accountant, for example, might earn 500 trade dollars for doing a Web designer's taxes and use the credit to purchase a copier. The exchange collects a commission -- typically 5% -- in "real" money from both parties. Traditionally, exchanges have also charged membership fees of $100 to $700 up front and $10 to $50 a month.
Calling such a system "barter" is technically incorrect, industry veterans agree. "We're not trading," says Chris Haddawy, cofounder of Barter Business Network, which was acquired in 1999 by BarterTrust.com, a San Francisco-based start-up. "This is no more barter than if you barter $5 for a sandwich, and the deli barters that $5 to get its windows cleaned." True barter involves a direct swap, be it as prosaic as baby-sitting for grocery shopping or as fanciful as performances of Noel Coward plays, at the depression-era Barter Theatre, in return for pickles and ham. The opportunity for true barter is limited because each transaction requires what economists call the "double coincidence of wants": unless the buyer has what the seller wants and the seller has what the buyer wants, there can be no trade. By creating trade credit, barter exchanges circumvent the unlikelihood of the double coincidence and enable a much wider range of deals.
Barter has some advantages over money. Doug Jones, president of Color Inc., a 20-employee graphics production and printing company in Tempe, Ariz., joined a local barter exchange at the beginning of the year. When business is slow, he reports, "I can call Laurie at the Barter Group and say, 'Open the gate.' They'll put me on their site as an available printer, and they also call potential customers. They hustle the other members to send me jobs."
Others see barter as a low-cost way to acquire goods and services. Businesses with excess capacity can often provide an additional unit of their product at little or no cost. For a dentist the marginal cost of a cleaning may be pennies for toothpaste, leaving the gross margin close to 99%. By earning barter dollars and using them to cover some expenses, the dentist can buy at a comparable discount and conserve cash.
Melissa Laughlin, the owner of Buckeye Web, in Gilmer, Tex., agrees. "I would love to do everything through barter," she says. During the past year Laughlin has acquired a $2,600 laptop and $400 worth of office supplies through an online exchange. Sales of her Web design and desktop publishing services covered half the cost, and an interest-free credit line paid for the rest. Most exchanges extend credit to customers, with fees among the new online players running from 0% to the prime rate. At those rates, barter compares favorably with many of the financing options available to growing businesses -- very favorably in the case of credit card debt. "This turns human capital into bootstrap capital," says Timothy Fong, founder of LassoBucks.com, a Los Angeles exchange. "It's a creative way of doing finance."