Published: February 22, 2011
Text of Article
Online barter networks give businesses options when cash is tight
Reporting from Oakland, CA
When Oakland restaurateur Henry Vortriede needs more bread for his eatery, he doesn't have to spend cash to buy it. Instead, he turns to barter, an ancient form of commerce that is attracting new converts during a struggling economy.
But Vortriede isn't restricted to bartering directly with a baker down the street in exchange for providing free meals at his Montclair Bistro. That's because the restaurant is among businesses that belong to fee-based online barter networks that make it possible to trade with many businesses.
"I'd rather cater a holiday party and get a couple of thousand of BizX dollars, and then spend that on our bread, coffee, wine, and plumbers and electricians," said Vortriede, who belongs to BizX.com, a barter network operated by BizXchange Inc. in Washington state. He has also used BizXchange dollars to cover construction costs for adding a banquet room.
The advantage to bartering for businesses is that it allows them to pay for goods and services with trade dollars instead of using cash, get rid of excess inventory and find new customers through a network. Barter networks can also provide qualified members with a line of credit that can be an alternative to a conventional loan.
A downside is that goods and services obtained are typically not discounted as they might be in the non-barter marketplace.
It's not just small- and medium-size businesses that turn to the barter economy. Fortune 500 companies also barter. Businesses can use their trade dollars — which amount to an internal currency recognized only within the network — to buy goods and services from other members. Some barter networks are regional, while others are national or international.
There is neither an advantage nor disadvantage to using barter instead of cash for business expenses. That's because taxes still have to paid on barter transactions.
Tony Cassara, owner of Cassara's Fine Men's Wear in Dublin, Calif., is a member of IMSbarter.com, a barter network run by International Monetary Systems in Wisconsin. He has used trade dollars to help manage excess inventory and pay for business expenses.
"Barter is better for business. It is not cash," Cassara said.
When a purchase is made, trade dollars are deducted from the buyer's online account and added to the seller's online account. Debits and credits of trade dollars are done electronically.
Barter networks can free a business from having to spend cash, but they are not free to use. For example, there is a one-time cost of $795 to join BizXchange, along with a monthly $30 membership fee, plus a 6% transaction fee on every purchase and sale.
At IMSbarter.com, there is one-time cost of $695 to join, along with a monthly $12 membership fee, plus a 6% transaction fee on every purchase and sale.
The fees charged by barter networks cover the cost of providing a bartering platform and the services of barter account executives who work with members. The networks also act as a third party to send out paperwork required under Internal Revenue Service rules.
Barter exchanges also extend lines of credit to qualified members so they can make purchases before they have made sales. The lines of credit are paid back in the form of trade dollars made from sales to other members. (Interest charged on lines of credit goes into a special fund to cover lines of credit that are not repaid.)
Barter networks tend to get more popular during a rough economy, said Chris Haddawy, founder and chief operating officer of BizXchange.
"People are definitely more interested when economic times are hard," he said. "We are really in the business of marketing someone's excess capacity. If a dentist would like patients in his chair for 40 hours a week, and right now his business has only enough business for patients to be in his chair for 35 hours … this is excess capacity."
By joining a barter network, that dentist could sell those unused five hours to members, then use the trade dollars to help pay for business expenses, Haddawy said.
"It becomes much more interesting to people, and they react much more positively when business is slower, as it has been in the last couple years," he said.
Trade transactions at BizXchange have gone from $30.6 million in 2006 to $63.8 million in 2009, the last year figures were available.
Worldwide, barter networks accounted for about $12 billion in transactions among members in 2010, according to the International Reciprocal Trade Assn.
Alan Robinette, owner of Window-ology, a Pleasanton, Calif., maker and retailer of customized window coverings, uses IMSbarter.com.
He has used trade dollars to help pay for employee work shirts, a copier and phone system, and a Pepsi dispenser. In addition to not having to pay cash for business expenses, it helps him grow his business through referrals.
"When times are tough, cash is precious. We don't want to spend it. I want to use trade," said Robinette, who estimates that about 4% of his revenue comes from trade dollars.
"It has also created a lot of cash business for us. I have done a number of trade jobs where people call and I go out and only half the amount is trade. They pay the rest in cash," he said.
Businesspeople who use barter networks need to figure out whether it makes economic sense before they make a purchase, Robinette said. "Just because someone is trading does not mean they are a good deal," he said.
Barter networks are not new. What is new is that they are now online, which has made it easier for a wider range of businesses to trade goods and services, said John Strabley, executive vice president of International Monetary Systems, a publicly traded company founded in 1985.
"It's really taken the whole bartering platform up to the next level," he said.
Even though discounts are not typically found through barter networks, members can still come out ahead because they don't have to discount what they are selling, Strabley said.
"Let's say a restaurant needs to spend $1,000 on carpet cleaning. They've got two choices: they can open up the till and give $1,000 to the carpet cleaner," he said. "Or they can make $1,000 worth of gift certificates available for sale [that cost the restaurant $300 to provide]. They are still ahead of the game."