Companies big and small are using barter to sell and purchase goods and services. When someone first told me that barter was big business, I flashed on a vision of storehouses piled high with pukka shells and trading beads. The reality couldn't be further from that image.
More efficient, better cash flow
In the simplest form of retail barter, a business that trades a dollar's worth of product or services to another business would get a dollar of ''credit.'' That credit then can be used to purchase goods or services from other companies in the barter system. The exchange companies help expand barter beyond a direct trade between two entities, allowing literally thousands of businesses to indirectly trade with one another.
Boosters of barter say it can be a technique for reducing inventories, increasing sales, improving cash flow and utilizing a business's excess capacity.
''Let's say you have a printing company with certain fixed overhead expenses and more [printing press] capacity than you are using,'' says Debbie Lombardi, president and founder of Barter Business Unlimited (BBU), a barter exchange company in Newington, Conn. ''Would you rather write a batch of checks for those overhead costs every month, or would you rather develop new markets through barter so you can trade some of that excess capacity instead of cutting checks for the things you need?''
The International Reciprocal Trade Association says that more than 470,000 companies, including about two-thirds of the companies listed on the New York Stock Exchange, do in excess of $12 billion in barter annually. (Full disclosure: Microsoft, owner of this site, is one of the corporations that engage in barter.) Companies that facilitate barter exchanges typically charge some combination of an annual or monthly fee and a commission on trades.
''With barter exchanges, you're not wedded to doing business on a buy-and-sell basis with the same person,'' says Paul Trump, executive vice president of the Illinois Trade Association, another barter exchange company.
Trump says that more than 400 restaurants in the Chicago area work with his company to barter their product — typically meals or catering — for advertising and other services. Think of it as trading steaks for sizzle.
Putters for health benefits
Some of the exchanges can get pretty interesting. Barter Business Unlimited was working with a golf club manufacturer that was looking for a way to increase its marketing efforts. The company also had a second need: It wanted to improve the overall benefits package offered to its employees.
Here's the barter that developed: The company agreed to make special custom putters for another company that was sponsoring the Super Bowl. The custom putters put the company's name in front of a group of (dare I say it?) big hitters whom it might not otherwise have reached.
With the ''barter credits'' from supplying the putters, the golf club manufacturer was able to pay for promotional brochures from another barter participant. The company also had enough credits to purchase an eye care and dental benefits program for its employees from yet another barter participant.
Exchanges can take place electronically, but the human factor has not been eliminated from all of these ventures. Lombardi says that even in an age where electronic swaps are possible, about 90% of the barters her company handles still involve a BBU representative matching customers to products. BBU, in business since 1992, has more than 2,000 members and is involved in more than $30 million worth of transactions annually.
Big business in corporate trades
In another form of barter, companies such as Active International work with businesses to trade inventory for media, goods or services.
''In these corporate trade transactions, a company typically sells excess or slow-moving inventory for more than they could get based on the assets' current fair market value,'' says Rich Vendig, chief executive officer of Active International. ''Then, the company can use a combination of cash plus the trade credit it got to make advertising or other purchases.''
Active International says it is involved in more than $700 million in media transactions annually. ''The result of trading is that you greatly improve your overall cash flow. You are also able to dispose of underperforming assets such as inventory for more than you could get otherwise,'' Vendig says.
Not cash, but still a tax event
Just a word about the tax man: Even though no cash changes hands in barter, barter deals are treated the same as cash transactions. In its simplest form, you'll report the value of whatever you sell as income, and deduct the cost of bartered purchases as expenses.
Think of barter as a way of boosting your business, not as a way of cutting your taxes.
Joseph Anthony is a financial writer and enrolled tax agent who advises small businesses and sole proprietors as part of his tax preparation and planning practice.
Debbie Lombardi
debbie@bbubarter.com
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