Let’s make a deal – barter deals
When Susie Duboe, owner of Hinsdale Furriers, in Hinsdale, Ill., wanted to hire a magician for an employee pizza party, she traded fur-storage space for the pizzas and the magician.
When Terry Brandfass, a business executive in Scottsdale, Ariz., was pregnant, she exchanged gift certificates from a clothing store for D. Barry Gershwire’s medical services, which included prenatal and postnatal care and the baby’s delivery.
Such trading of goods and services, known as barter, has become a flourishing industry in the United States over the past 10 years. In 1980, goods and services worth $1.7 billion were bartered, and by 1994 the volume had grown to $8 billion, according to Paul Suplizio, chief executive of the International Reciprocal Trade Association, in Alexandria, Va.
Industry experts expect the growth to continue as more entrepreneurs discover advantages in barter arrangements. Today, more than 300,000 companies in the United States use barter for a portion of their business, up from about 70,000 companies in 1980, according to Suplizio, and the number is expected to increase to 1.2 million companies in six years.
Although it may sound easy for, say, an accountant to do someone’s tax return in exchange for four tickets to a Los Angeles Lakers game, the concept of barter can become complicated.
For example, let’s say the owner of a carpet store agrees to install new carpeting in the offices of a printer in return for the printing of sales brochures. Sounds simple, but what if the cost of the printing is $500 while the cost of the carpet is $2,000? Or what if the printer needs the carpet installed immediately, but the carpet retailer doesn’t need the brochures printed for three months?
Enter the barter exchanges.
A barter trade exchange is a conduit for matching and completing trades. Instead of trying to set up direct one-on-one trades, the exchange offers its members what are typically called barter dollars. When a member provides goods or services to other clients of the exchange, the member’s account is credited with barter dollars. The member can then use those dollars to purchase the goods and services offered by other exchange members. A printer may do work for a carpet retailer but may use the earned trade dollars for jewelry, lawn care, or a new wardrobe.
Barter trade exchanges typically charge a start-up fee of $50 to $750 plus a fee of 10 to 15 percent of the value of each transaction. In some exchanges, clients can pay a larger start-up fee and reduced transaction fees, or they can avoid the start-up fee by paying higher transaction fees.
At the end of the year, the barter exchange sends each client an Internal Revenue Service Form 1099 and a copy to the IRS. For tax purposes, the receipt of barter dollars is the same as the receipt of real dollars for goods sold or services rendered and should be included in gross revenues. Conversely, barter purchases are business expenses and are deducted as such. Therefore, barter dollars are treated the same as cash dollars.
Why would a business owner use barter rather than simply make purchases in the open market? Essentially, the reasons are to save cash and improve collections.
“Through barter, businesses can obtain goods and services without using cash reserves or increasing their use of credit,” says Susan Groenwald, president of Barter Corp., an exchange in Oakbrook Terrace, Ill. “Barter also gives companies the ability to dispose of excess inventory, utilize excess capacity, and sell to new clients.”
For instance, consider an office-furniture company that needs its parking lot resurfaced but lacks cash for the job. If the company has an excess inventory of filing cabinets, those cabinets could be traded through the exchange to any other exchange client for barter dollars.
The furniture company could then use those barter dollars to pay the paving company to resurface the parking lot. No cash would change hands; no credit would be extended; the furniture company would dispose of its excess filling cabinets; and the paving company would get a customer it might not have had otherwise.
That’s exactly what Vincent Petrini-Poli, owner and chief financial officer of Standard Equipment & Supply Corp., in Hammond, Ind., did in a turnaround situation two years ago. His company sells tools, supplies, and equipment to manufacturers and construction companies. “We needed to liquidate some assets that were in an overabundant supply and turn them into cash,” he says. “That wasn’t easy to do, so we turned to barter, which allowed us to buy other assets that were more in line with our current needs.”
Petrini-Poli bartered old furniture, filing cabinets, and excess inventory for a $50,000 computer system, copying machines, and fax machines. “We needed technology systems for inventory control, accounting, etc.,” he says. To date, he has contracted for the purchasing and selling of about $250,000 worth of goods and services.
Petrini-Poli’s trades were fairly straightforward, but by using barter, a company can participate in all sorts of creative trades. Terry Brandfass, who is president of the World Trade Network and Business Exchange International, in Scottsdale, has a client who is a jeweler. Through Business Exchange, the jeweler traded jewelry to several other clients, coupled those barter dollars with his home, and traded for a larger house. The person who got the jeweler’s home then traded it to someone else for a duplex.
Another creative way to use barter is to improve bill collections. Accepting products instead of cash in order to retire an old receivable can expedite collections without the cost of using a collection service.
Almost any company can become a member of a barter trade exchange. Barter Corp.’s clients include large manufacturers, service companies, retailers, dentists, banks, funeral directors, and even actors and magicians.
Some businesses, however, are unsuited for using barter. Those are the companies with highly specialized products or services useful to only a select list of clients. If other members of the barter exchange can’t use your product or service, you won’t be able to make any trades.
And although barter can be used in all sorts of ways, it also has its limitations. While it can be done, most companies do not use barter for their fixed costs such as rent, electricity, heat, or payroll. According to Groenwald of Barter Corp., companies that use barter typically limit transaction amounts to 5 or 10 percent of the company’s total annual expenditures.
There are more than 600 barter trade exchanges across the country, and the number is growing. ITEX Corp., in Portland, Ore., recently became the first barter exchange to be listed on the NASDAQ stock exchange.
With so many barter exchanges in existence, how do you choose the one that’s right for you? Just as you would with any other professional organization you might join, you should do a certain amount of research before contracting with a trade exchange:
* Visit the trade exchange; meet the people who would service your account. Be sure they are professional and are people with whom you would want to have a fiduciary relationship.
* Obtain a list of clients and the products and services they offer. If you can’t use the other clients’ goods and services, there’s no reason to join.
* Get referrals of current or previous clients. Find out if they’ve encountered any pitfalls in working with the exchange. If they have left the exchange, find out why.
* Ask about fees. You should have a firm understanding of what you would be charged to join the exchange and what you would pay for each transaction.
* Check out the exchange’s background. Write the International Reciprocal Trade Association, a trade group for barter exchanges, at 6305 Hawaii Court, Alexandria, Va. 22312; or fax queries to (703) 237-1829 or (703) 354-0370.
When working with a barter exchange, consider how much barter your company can support. “I’m always very cautious when I do a barter sale to be sure that I know where I’m going to spend my barter dollars,” says Susie Duboe of Hinsdale Furriers. “If those dollars were cash, they’d be growing for me, but barter dollars don’t earn interest, so I want to spend them as quickly as possible.”
Duboe barters primarily her fur cleaning, repairing, and storage services, but she has also bartered a full-length mink coat. “When I moved and was having my kitchen remodeled, it was perfect,” she says. “The retail kitchen store and even the electrician I used were all on barter. I knew exactly how I was going to spend all those barter dollars.”
The concept of barter can be a little confusing at first and can scare away business owners who aren’t willing to spend a little time learning how it works. The best advice is to consider barter the same as a cash transaction. The final outcome is the same, as are the tax consequences.
COPYRIGHT 1995 U.S. Chamber of Commerce
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