Barter Grows Up

Corporate trading is morphing into an online, cashless market

If you still think of commercial barter as a glorified swap meet—I’ll print your business brochures if you’ll fix my wiring—you have not kept up. Trading has grown into a sophisticated, national industry with several large players that are acquiring smaller groups and creating massive online directories and markets, says Tom McDowell, executive director of the Mentor, Ohio-based National Association of Trade Exchanges (www.nate.org). That means that you are no longer limited to trading solely with local business owners. Nor are you restricted to commodities such as printing and plumbing—the exchanges facilitate sales of all sorts of products and services; what you sell turns into trade credits that can be used for virtually anything available on the exchange.

Bartering is Becoming Big Business

Barter has clearly taken hold among small business owners, who have a particular interest in preserving precious cash. About 500,000 U.S. businesses were involved in about 200 barter exchange networks in 2005 and traded $8.25 billion worth of goods and services, according to the International Reciprocal Trade Assn. (http://www.irta.com/). The business is growing by 7 percent to 10 percent annually as customers sign up to sell excess inventory, break into new business markets, cultivate customers, save on capital expenditures, and obtain products and services they might not otherwise afford.

Cynthia McKay, CEO of Le Gourmet Gift Basket Inc. in Castle Rock, Col., says barter has enabled her to keep operating costs “ridiculously low” and move her company from a cash-starved startup to a multimillion-dollar business. “I couldn’t have done it without bartering,” she says. “I just didn’t have enough cash,”

McKay continues to rely on corporate trading, which she figures saves more than $100,000 annually. She offers her gift products and her services as a business consultant, using credits she earns for everything from office supplies to contracting, landscaping and legal services. She also “buys” perks for her 28 employees, such as plane tickets and facials. One of her best moves: trading credits for a classified ad in USA Today worth about $400. That helped her land vendors and distributors in Canada, Mexico and Alaska, and boosted revenue nearly 20 percent in one year. Another coup: She exchanged a franchise to get a tradeshow booth, where she then sold 12 more franchises.

The Art of the Trade

Here’s how it works. Members assign market values to their products and services and post them in an online directory. In return, they receive trade credits— “cash” to purchase things. Exchanges keep the records and monitor the deals. One-time enrollment fees for business-to-business exchanges typically run from $500 to $800. Members are sometimes charged a modest monthly charge of $10 or $15, and pay a 5 percent or 6 percent commission for each trade they make.

Continental Trade Exchange in New Berlin, Wis. (ctebarter.com) is one of the major players, having snapped up 16 smaller exchanges. Its 7,000 members traded $52 million worth of goods and services in 2005, according to company president Dan Mardak. He predicts that number will reach $70 million this year.

CTE staffers can negotiate complex transactions for travel and media, and work with other exchanges in the U.S. and abroad to help members execute deals. Its media business has a network of hundreds of regional and national media brokers, who can help members use trade credits to purchase advertising in newspapers, consumer and trade magazines, and radio networks such as Clear Channel. “Because of our size, we are able to attract big-league companies,” says Mardak.

McKay, for example, routinely uses exchange credits to purchase ads in magazines that reach potential new markets, such as college students and stay-at-home moms. The ads are an inexpensive way to test demand among such consumers, she says.

Not all Barters are Created Equal

While the Internet has created the technology platform for more sophisticated trading, it has also provided an opening for crooks. Krista Vardabash, executive director of the International Reciprocal Trade Assn. (IRTA), warns business owners to make sure they are dealing with a legitimate outfit before committing to trading on a particular network. Ask for details about how long the exchange has been in business, the volume of transactions it handles, fee structures, available inventory, dispute resolution services and customer service support. Look for exchanges that have joined IRTA or the National Association of Trade Exchanges, which accredit exchanges and require members to abide by a strict code of ethics and standards. You can also demand references that you can check out and see where the outfit stands with the Better Business Bureau.

It’s also important to make sure that the exchange has what you need. You don’t want to join an exchange where all you can get are Beanie Babies or old computer parts.

And don’t forget, just because no cash trades hands, bartering is still a taxable transaction. Sole proprietors file the income on Schedule C of Form 1040. Other small business entities must report bartering as miscellaneous income. A barter exchange will track all of your deals for you, issue a Form 1099-B, and report that income to the IRS.

Resources:

Both the International Reciprocal Trade Association (irta.com) and National Association of Trade Exchanges (www.nate.org) have detailed information about trade exchanges on their websites. They also feature directories of exchange services in the U.S. and overseas. Barter News (www.barternews.com) covers the evolving industry.