Barter Explained: The How To’s and Why’s Of Bartering

Barter is the most topical buzz-word in business right now due to the continued bad economy and the dire need for American companies that are going to foot the tax bill for the bail-out to be more creative. Competition is greater than ever, credit is still very tight, and people are more reluctant to spend on non-essentials. Unemployment creeping dangerously close to 10% isn’t helping calm the mayhem either.

So, what is barter and why is there such a buzz about it?

Barter, simply put, is the cashless exchange of goods and services between parties. An example of a barter would be a florist exchanging a bouquette of flowers for an oil change at a car repair shop.

But why do companies barter, and how does it work?

Let’s build on the above example. The florist has already bought and paid for the flowers (they are in her inventory as a perishable item.) What does it really cost her to put together a $35 bunch of flowers? Her cost (cost of goods) is probably about $15, if it was any higher, she would not have the gross margin available to cover her overhead (rent, insurance, marketing, salaries, etc.) So, if she trades that $35 bunch of flowers for an oil change she would have paid $35 cash for, here are her benefits:

1. She just saved herself $20 in cash
2. She turned over her inventory
3. She potentially made a new customer
4. She has potentially marketed herself to a new area

How does this benefit the mechanic? It helps him in much the same way. He saves himself the cash outlay for the flowers, she becomes a new customer, she may recommend him to her friends and associates, and he filled some dead or down time he had.

That sounds like quite a laborious way to save $20 cash, right?

So, why is there such a buzz about bartering, if companies are saving so little? The above scenario was an example of traditional barter or what is called reciprocal trading (just like the old days, two parties trading with each other.) Even though it seems a small saving, it’s actually almost a 50% cost reduction. What if you could save 50% on other things? Construction work, landscaping, printing, perhaps put on a new roof, take a vacation, do more advertising, or repave your parking lot?

The challenge of traditional barter, and the Merchants Barter Exchange (MBE) solution.

Any smart business owner would love to be able to save 50% on their cash expenses. The problem with traditional barter are:

1. Finding a match – how do you find a roofer that wants $5000 of flowers?
2. Timing, if you do find a roofer, do they want the flowers now?
3. How do you ensure the trade happens?

Horror stories abound with people trying to barter with others and not getting a fair deal: either they give their stuff and the other party doesn’t reciprocate, or they short them, or it simply doesn’t happen as planned. Obviously, there is no benefit to something that doesn’t happen correctly, but how do you ensure it is fair for all concerned? Even using an organized barter company from the last century had its problems (inflated pricing, cash-blends negating the savings benefits, cash business converting to barter, and under the table deals.)

That was all until Merchants Barter Exchange (MBE) came on the scene in 2000, setting a brand new standard for organized bartering and changing the industry forever. Since then, every other barter company of any size has been trying to copy the ethics and standards of MBE, which thus far is the only American barter company to be able to do large scale bartering (like $100,000 of printing, $70,000 of paving work, $30,000 worth of appliances, all entirely on trade with no cash.)

So what does MBE do differently?

By acting as both the bank and the co-ordinator between transactions, MBE is able to control how trades are handled. In simple terms, demand for goods and services comes into the MBE central brokerage from the members around the US. From there, the barter experts co-ordinate where that demand goes. Nothing is traded directly, so there are none of the challenges of one party going first, then not getting stuff in return. The MBE brokers keep track of everything via their sophisticated software platform, transferring barter dolars as credits for the equal cash value of trades.

It sounds very simple, and MBE makes it look so, but be warned: many companies have tried to copy their model and failed, losing hundreds of thousands of dollars. American Express was involved at the same time as MBE started in 2000 with an online barter group called BigVine.com. By 2003 they had entirely blown a $800m budget. Because of the new standards MBE are setting, many older barter companies are actually going into decline right now, rather than expanding. Even BarterCard, the world’s largest barter company, could not maintain a presence in the US for very long and after less than 3 years filed bankrupcy in 2006.

What are the tax implications?

Obviously, any form of commerce has the interest of Uncle Sam. Back in 1982, an act of Congress deemed all barter companies the same as banks and credit card companies (“Third Party Record Keepers”) as such they must issue 1099b forms to members each year, and all transations are treated the same as cash for reporting needs. See here for IRS details (http://www.irs.gov/taxtopics/tc420.html).

All in all, barter – when done correctly via an organization like MBE – can be an incredibly positive business and marketing tool for any business big or small. The main point, do your research, don’t be rushed in to a direct trade, and make sure they adhere to the MBE bartering standards: can you buy first? Are all transactions 100% on trade (no cash element for parts, etc.)? Are all prices 100% the same as cash? (if they are inflating the price, remember you’re paying more commissions!) Are you only being charged when you buy? (if you are being charged selling and buying, where’s the motivation on the barter company to help you spend?)

Barter is a lot of fun, and you don’t have to be in business to enjoy it – remember when you used to trade baseball cards? It’s basically the same thing. In that scenario though, can you imagine trading your baseball cards for a new car? That would surely be a school kid’s dream come true!