Is a Barter Exchange Right for Your Company?
Bartering is an alluring concept, especially when sales are down: You can unload excess inventory and get things your company needs -- all without spending precious cash. So it's not surprising that bartering is on the rise. In a recent survey by American Express OPEN, 23 percent of small businesses said they had increased bartering activities since the onset of the recession. But bartering isn't right for every company, and sometimes it can be deceptively expensive.
Part of the reason more businesses are bartering is simply that it has gotten easier. Several websites, called barter exchanges, have cropped up to connect businesses interested in swaps. Unlike a direct trade, in which a vendor accepts your goods or services as payment, on a barter exchange you sell your wares for so-called barter dollars. That currency allows you to buy goods or services from other exchange members. This type of system is designed to create more mutually beneficial trades, but it doesn't always work that way.
Just ask Mike Truese, owner of Mike Truese Creations, a Web design firm based in Jersey City. Several years ago, Truese joined a barter exchange called ITEX. He figured he could save money by trading design services for some printing and promotional items his company needed. After about six months, he had earned about $10,000 in barter credits. He used some of those funds to have some printing done, but he wasn't very happy with the work. After that, Truese says, he struggled to find anything he wanted to buy on the exchange. At one point, desperate to spend, he bought 25 bars of soap at $4 a pop. Finally, Truese abandoned his remaining barter dollars, tired of paying ITEX's monthly membership fees. "I designed six websites and wound up with worthless barter bucks -- and soap," he says.
As Truese can attest, trades on barter exchanges are not completely cashless transactions. Many exchanges charge monthly fees of up to $30. And although exchange users pay one another in barter dollars, many barter exchanges charge both sellers and buyers transaction fees -- typically 5 percent to 8 percent of each purchase, which must be paid in real dollars. Plus, the government requires sales tax on most barter sales.
Bartering works best when the cost of providing the product or service is relatively low, or where markup is substantial. "It's difficult to barter for new computers, for example, where the markup is traditionally low," says Don Mardak, founder and CEO of the online barter exchange International Monetary Systems. As a result, he says, "About 70 percent of our barter activities involve services rather than products."
When you buy by barter, the prices aren't any lower than if you were shopping with cash. In fact, exchange members are encouraged to offer their wares at full price. Instead, any financial benefit comes from unloading excess inventory or services that you would otherwise be unable to sell.
For instance, John Sarantakis, owner of People's Choice Family Fun Center, an arcade in Waukegan, Illinois, says his company acquires used DVDs for $1 apiece and is able to refurbish them and resell them for $10. Given the choice, he would rather sell the DVDs for cash, but as business slowed this summer, he turned to bartering more and more.
Sarantakis calculates that on average, the items he sells on IMS cost him about 50 cents per dollar of list price. Therefore, he figures that items he buys with barter dollars come with an automatic 50 percent discount. "I bought 200 disposable cameras for $6.50 each in barter dollars, and we sell them for $6.99," he says. Because of that 50 percent discount, he figures his real cost for the cameras was $3.25 each, about $1 less than his distributor would have charged him.
Still, using barter credits often requires some creative thinking. Sarantakis used his barter dollars to rent a tent for a sale event, to take his employees horseback riding, and to rent a limousine. He also spent a large chunk of his barter dollars -- $12,000 -- on an electric three-wheeled car. Another $1,900 in barter dollars went to have the vehicle covered with his company's logo. Now the car functions as a rolling billboard for People's Choice, and Sarantakis never misses a chance to drive it through town, where curious crowds snap his photograph. "It's much more effective than an ad," he says. "I wish I could afford to hire someone to drive it all the time."