Tricks of the Trade
Barter sheds its shady image to become a cash-saving tool for small companies
Does your company's erratic cash flow keep you pacing the floor at night? One way to keep more dollars in the till is through barter -- trading your goods and services for merchandise you'd normally have to buy with much-needed cash.
Take Biozone Scientific LLC. The manufacturer of air purification systems, based in Vero Beach, Fla., recently hired an ad agency to revamp its Web site and marketing materials. The tab? About $30,000. But the 25-person company isn't spending a cent. Instead, Biozone is exchanging its systems for "barter dollars" -- credit given in exchange for goods and services. Who dispenses this non-money? In Biozone's case, it's Barter Business Unlimited, Inc., a trade exchange in Bristol, Conn., that hooks up barter-friendly businesses. For every air system Biozone sells on the exchange, the manufacturer receives barter dollars of comparable value. With $30,000 in credit, Biozone raised enough to contract the ad agency, also a member of the exchange.
Although hardly a new concept, barter has never been more popular. Thanks to the emergence of trade exchanges 15 years ago, barter has escaped its dubious image of unscrupulous businessmen secretly dodging taxes by swapping goods off the books. Now it's a well-governed sales vehicle for the small-business marketplace, incorporating about 400,000 companies. The National Association of Trade Exchanges estimates barter's growth at 10% annually, with trade as high as $4.3 billion a year.
On the books, barter and cash transactions are treated the same by both accountants and the Internal Revenue Service. Barter sales add to the bottom line, while barter purchases are booked as operating expenses. The only difference is that come tax time, Uncle Sam wants to see barter sales listed on a 1099B form. And don't even try to fudge the numbers. The valuation of trade-exchange deals are tracked and reported to the IRS. If your figures don't match, you're busted. And don't go overboard. Let barter reach more than 5% to 7% of sales and you may not have the hard cash to pay the staff or the electric bill. The more company costs vary from month to month, the greater the risk that heavy bartering will choke cash flow when revenue dips. On that basis, barter works best when you have too much inventory.
To find an exchange, try the National Association of Trade Exchanges (www.nate.org) or the International Reciprocal Trade Assn. (www.irta.net). But choose carefully. Kurt Kluznik, owner of Yardmaster Inc., a Cleveland landscaping firm, couldn't find the right mix of products and services on his first exchange. Now at Euclid, Ohio-based American Trade Exchange, he barters for trailers, trucks, office supplies, and ads. Sounds like the barter industry has the goods this time.
By KAREN M. KROLL
This article was originally published in the October 11, 1999 print edition of Business Week's Frontier. To subscribe, please see our subscription policy.