Trading Places: Inside the Barter Economy
Once a dusty corner of the economy, barter is emerging as a hot entrepreneurial niche and a valuable tool for cash-crunched companies.
Not so long ago the idea of abolishing the dollar enjoyed a certain vogue. Long the preserve of populist agitators, antidollar sentiment veered sharply rightward in the 1980s as adherents of the "competing currencies" school called, "Death to the Federal Reserve!" Private currencies, they argued, would be more solid than government-backed money because issuers' profits would be tied to maintaining their worth.
Fast-forward a dozen years. The national motto is "In Alan Greenspan We Trust," and the U.S. dollar economy is the envy of the world. Yet interest in private currencies is stronger than ever, not, this time, at inside-the-Beltway think tanks but among upstart barter exchanges sprouting from that most propagative of roots: business-to-business e-commerce. At the same time, 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," he says. 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.
Money, of course, does exactly the same thing.
But 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. "Cash is a four-letter word; don't use it," says Alan Zimmelman, executive director of the National Association of Trade Exchanges (NATE). And although even proponents concede that bartering takes extra time and effort, "it beats paying money," says Bob Weisberg, general manager of Affordable Office Furniture, in Cleveland.
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."
Unfortunately, not everything can be acquired readily on trade. Services -- especially media, travel, restaurant dining, accounting, and printing -- account for 60% to 65% of the offerings in the typical exchange. Raw materials and manufactured goods -- products with lower gross margins -- are less common. Consequently, barter is most effective for companies that have some flexibility in their purchase decisions, explains Susan Groenwald, who sold her 3,000-member exchange to BarterTrust in 1999. "You're talking printing, office supplies, car repair, janitorial," she says, categories that typically add up to 5% to 7% of a company's expenses. Few exchanges offer opportunities to cover overhead expenses, such as cost of goods, payroll, and rent.
As a result, many companies whose goods or services are in demand on barter exchanges complain of difficulty using the trade dollars they earn. "I can quickly build up a bank account of 10,000 barter dollars, but I can use very little of that for my business," says Jones. "I can't use it to pay the light bill, I can't pay payroll, I can't buy paper, I can't buy ink." Instead, Jones spends on extras, such as yard maintenance for his home and takeout lunches for his crew. Dan Swing, president and CEO of the Computer Guyz Inc., a two-person information-systems consultancy in Greenville, S.C., has bought boxed cigars for clients, Marriott Hotel certificates, and a weekend bed-and-breakfast getaway. "I probably wouldn't have purchased most of it if I had had to pay real money," he admits. NATE's Zimmelman agrees. "Many people see trade dollars as Monopoly money," he says.
