Monday, January 14, 2013

B to B Bartering - A Tool for Small Businesses

Barter is an ancient form of exchange in which a person traded something he owned for something that someone else had and he wanted or needed.

A major problem with a barter system is the fact that one has to spend time searching for another person who both has what one wants and is willing to trade it for what you have to offer. 

The introduction of money removed this inefficiency as money is a universal good that everyone wants and thus be traded for anything anyone is willing to sell.

However, while the use of barter has for the most part been replaced by the use of money it still comes in handy on occasion.

In a previous article, Bartering Pepsi Cola for Vodka and Tanker Ships, I described how Pepsi Corporation got around the problem of repatriating profits from the production and sale of Pepsi Cola in the old Soviet Union by basically accepting vodka and tanker ships in exchange the cash it earned in the Soviet Union.

Currency controls and lack of foreign exchange in some countries make it difficult for foreign companies to do business in these nations.  In these cases, barter may be a solution.  In essence the company selling its product in the country accepts goods produced in the country in lieu of cash.  It then brings the bartered goods to its home nation where it sells the bartered goods for the cash it would have earned in dealing with the nation which either forbid the export of currency or lacked hard currency reserves to make the payment.

Small businesses, especially those starting out often lack the funds to obtain the supplies they need to produce their product.  Barter can be a solution in these cases as one small business can trade the goods or services it has to offer for goods or services it needs from other small businesses.  However, searching for such matches is inefficient.

Enter barter exchanges.  These are organizations that enable small businesses to trade their services without having to spend time searching for those  both offering the good or service the business needs and also wanting what the seeking business has to offer.

With a barter exchange, a business simply provides its good or service to a business seeking that good or service and receives a credit to its account with the exchange for the value of what it provided.  The selling business can then use the credit to purchase a good or service it needs from another participating member. 

For example a motel (most of which, despite bearing the name of a national or global chain are actually franchises and thus operate as a small local business) may need some computer work done.  Rather than searching for a small business providing tech services, the motel owners simple look in the local barter directory for a tech company and call to have the work done. 

The motel pays for the work by transferring barter credits (either by writing a check against its barter account or transferring them electronically) from its account with the exchange to the tech company's account.  The credits are equal to the dollar value of the services it received. 

What the tech company receives is not motel services but the dollar value of these services.  It can then use those credits to purchase some other good or service it needs such as tools or replacement parts for computers or services such as marketing, printing, meals at a restaurant, etc.  However, somewhere along the line some other member, who has never provided services to the motel may need a motel for a meeting or workshop will use its credits from other trades for the room at the motel.

Generally the barter exchange will charge small membership and exchange fees which have to be paid in cash but these are small compared to the value of services being exchanged.  Also, the dollar value (which is what is credited to a member's account when trades occur) is reported to the IRS for income tax purposes.

The best way to become involved with barter is to join an exchange or use a service like Craigslist.  Links for some large exchanges are listed below.

IMS Barter Exchange Network

Barter Exchange Network


No comments: