Bartering, the world’s oldest business practice is making a comeback.
The concept of bartering — trading goods or services without money — existed long before the advent of cash currency. Today’s small business bartering however is not as simple as walking into a market and trading a chicken for a wool scarf.
Third party firms, companies that establish bartering networks between businesses, now dominate the industry — helping exchange everything from garden services, to breast implants, to college tuition and all without cash.
How does it work? If a landscaper chips his tooth, he could try to barter his landscaping services in exchange for dental services, says Ron Whitney, head of the International Reciprocal Trade Association. His agreement becomes a “barter credit.” In a traditional barter agreement, the dentist would accept landscaping as a trade for his services. However, in this instance, the dentist might use his "credit" in any number of ways, including another product or service, chairs for his office or perhaps a dinner at an expensive restaurant. Although no cash is involved, both the landscaper and dentist must report the exchanges to the Internal Revenue Service.
For facilitating trades, the third party networks charge standard signup and membership fees including:
- A one-time signup fee between $195 - $600 dollars, usually cash money
- Annual renewal fee between $50 and $60 dollars cash or trade credits
- Monthly fee between $5 and $15 dollars, cash or trade credits
- A fee for each barter transaction ranging between six and 15 percent with it being either on the buyer's side, the purchaser's side or split between both parties.
- While bartering can be beneficial to companies of all sizes, experts say the practice is a good resource for small businesses.
Whitney says that bartering is a perfect way for small companies to cash in on unused products, preserve cash flow, and expose themselves to new businesses.
Greg Allen started his company, BarterLink, to help minorities and women entrepreneurs expand their businesses.
“The larger and more diverse your barter group, the more opportunity to secure products and services you need for either your businesses or our personal life, while preserving your capital,” Allen says.
Lawrence J. White, an economics professor at the New York University, urges companies not to enter into bartering deals too quickly. He says companies should evaluate whether bartering is the best thing for their company.
According to Professor White, there are three reasons that people barter. He says if any of these steps works for your company, then you may want to consider using bartering:
- If you do not like dealing in cash.
- If you want to use price discrimination, meaning that, you are selling the same category of goods for different prices to different people.
- For arbitrage, buying under priced goods and selling or using them for a profit.
- If none of these applies to your business, White suggests maintaining a cash operation.
“If you read stories in the newspaper, it’s mostly about people who’ve found this to be a successful experience. You don’t hear about bad experiences,” White says. “Cash is king.
Being able to sell stuff for cash, and buy stuff for cash, is not just a great convenience, it also offers the security of knowing the true value of your purchases or sales.
“You know what you can buy with the currency, it’s stable, it doesn’t change very much from one day to the next,” he explained. “You sell something, you get cash for the sale, and you know the purchasing power of that cash. That’s a really powerful advantage."