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Whoever said cash is king never tried bartering.

For small business owners grappling with excess capacity and an inability to get a loan from banks, bartering can be more valuable than cash.

Bartering dates back to ancient times, when folks swapped goods and services for other goods and services they had. The modern way of bartering is to have networks of businesses across the globe that trade products and services either in person, over the phone or via the Internet without the use of cash.

Whether a lawyer in Houston has spare time on his hand or a local newspaper had extra ad space, businesses — largely small ones — can use bartering to get a host of services. Basically a small business joins a barter exchange and instead of using cash for goods and services, trades its excess capacity for things it needs. For example a furniture retailer could sell a couch and in return get credits that can be used for printing brochures. That couch may have languished in the store but on the exchange it found a buyer.

Bartering is a “great benefit to small businesses that want to use excess capacity as a currency,” said David Wallach, president of the International Reciprocal Trade Association, an industry trade group for barter exchanges. “It’s very profitable to businesses. That’s why they join it.” Members in bartering exchanges typically pay a membership fee or monthly maintenance fee and a percent of the sale.

At ITEX, the Bellevue, Wash., membership trading company that has 24,000 members and 90 offices around the country, that percentage is 6%. According to Alan Zimmelman, a spokesman for ITEX, barter exchanges work best in local economies and is done predominately via the phone or electronic messaging, rather than over the Internet. Members will use the Internet to search for ways to spend their barter dollars but will call or email one of ITEX’s brokers when they want to engage in a trade. “The Internet will grow but it is a slow process,” said Zimmelman, noting it’s easier to pick up the phone, send a text or email. ITEX members do use the Internet to post advertisements or electronic newsletters.

Members of bartering exchange NuBarter do use the Internet to make deals, even though the company has customer service reps at the ready to help members. On NuBarter.com members are given a line of credit and search for what they want to use that line of credit for. Once they find something they click buy and the seller is contacted via an email. If it is approved the seller and buyer will make arrangements.

NuBarter, which is based in Savannah, Ga., but has offices around the country and a network of barter exchange partners around the world, put together a network of roughly 2,300 members who trade among themselves. A line of credit is given to the members and NuBarter’s job is to make sure the goods and services stay balanced. For instance, NuBarter won’t let 10 hair salons on the network if there is only demand for two. What’s more, in order for a small business to be allowed into the network, it has to go through an interview process. The line of credit is based on criteria, including years of service, number of employees and size of the business, said Gary Field, president of NuBarter.

Members of NuBarter pay a one -time fee of $495, $15 monthly and a 12% cash fee on all transactions. For the fees, small business members get assigned a trade broker and access to business seminars, similar to Chamber of Commerce events. According to Field, NuBarter is a win-win situation for small business members because their barter dollars never go to waste if a service is not completed.

“If someone doesn’t get the services, they don’t pay,” Field said.

For small businesses that don’t want to become a member of one of these bartering exchanges, there are a host of websites that let individuals trade goods and services. BarterQuest is one example. On its site, goods, services and real estate can be traded around the world.

Like every business transaction barter exchange too has some risks involved with it. Before entering barter deals it’s important to analyze the risks involved along with the benefits for both parties.

Imbalance in trade: there is a possibility of imbalance between what you trade and what you get in exchange. As different products and services have different value units. Also, it is very difficult to measure value of services rendered. For example, one hour of plumbing work is not equal in value to one hour of secretarial or accounting work. Hence, absence of common measure of value or a medium of exchange can lead to imbalances in barter. Therefore, using a well established bartering system or network helps you minimize this risk. The values of the goods and services being bartered are determined by these organizations.

Problem of fraud: imagine you trade with a man to handle his tax books for a financial year and at the end of the year he will give your home a maker over in interiors. You did the work for him throughout the year but when the time came for him to fulfill his end of the trade he backed away. What will you do? Hence, to avoid such risks it becomes necessary to check the credentials of your barter partner. Also, always consider the need for a written contract underlining the terms of the barter contract.

Force majeure: these are referred to those major events which are always recognized as events of force and can arise from several causes, the two most common being either “acts of God or nature” like floods, earthquakes, hurricanes, snowstorms, severe winds, etc. or acts of government” like war, emergency, riots etc. In these situations, you might not be able to complete a barter contract and this in turn might lead to breech of contract. So for managing these risks insurance is important.

Terms and conditions: before entering a barter network go through its policies and procedures. Ensure that you are aware of its working. Before joining the club, ask about the policy regarding members who quit when they have a surplus of units. At one club, the management would give us one year in which to spend them.

Prepare for taxes, barter is not tax exempt: Many times people think that as they are bartering they are not liable to taxation. That is not the case. Bartering dollars are exactly the same as real dollars. Earn a dollar in a bartering system, and you’ll still have to pay taxes on that money in real dollars later. Plan accordingly! Otherwise you might become a tax defaulter.

Bartering can be a great way to market your business and gain new clients and trade for services you need for your business. However, there are pitfalls. Plan ahead, avoid the risks.

Brought to you by Neha Gupta
Marketing Department
Ormita Australia Limited
http://www.ormita.com.au