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Real Estate and Business

Barter: Pros & Cons

The Barter Trade: The Advantages & Dangers Of Bartering.

by Baldo Minaudo, M.B.A.

Before there was money, people used to exchange their products and services. This was called bartering. Merchants would negotiate the value of their products or services in exchange for other products and services. Of course, some people were better negotiators than others, or were simply better able to read the gap between supply and demand and take advantage of it.

With the development of specialized skills, techniques and equipment some individuals were able to produce more, much more than they needed to exchange for their goods. So, these individuals would sell their wares today in exchange for a promise to be paid in the future. As the number of these promises grew to where it was difficult to track by memory, they started to use specific objects that held some intrinsic value. In some cultures, certain types of beads or stones have been used to represent a certain amount of value, or labour unit. These objects made it possible for individuals to trade their services well into the future and to accumulate their labour over years to save up for large purchases.

Over the last couple of centuries, bartering was being practiced less and less throughout North America. However, in the last 15 years there has been a resurgence in bartering activity as witnessed by a large number of bartering organizations popping up in every large city. Among the driving forces for this increased bartering activity among businesses are increased government taxation, excessive capacity, and limited cash flow.

Bartering is a great way to get rid of extra products or capacity. If you consider that every business has supplies and services it needs to purchase. But, most small businesses also have limited cash flow. So why not exchange extra production for some items you would need to buy anyway.

That sounds simple enough – until you consider some of the details in bartering. Firstly, everything you produce has a cost of production and although you may have paid for it already, the cost still needs to be paid for. Some suppliers, such as Bell Canada will not barter with you.

Secondly, when you join a bartering group you have additional fees you are charged for each transaction. These fees can range from 5% to 7% at both ends of the transaction, plus GST. Think about it. You have $100 in extra t-shirts you want to barter in exchange for $100 in photocopy paper. When you sell the t-shirts at $100 you’re charged a minimum of $5 plus $7 in GST. Then when you buy the photocopier paper you pay another $5. That’s $17 you paid, $17 out of your cash flow. It would still be good if you were to buy that paper anyway.  But, what if you would be able to negotiate a 30% discount on the paper because you were going to pay cash. That means you would have saved $30 plus GST of $2.10. The difference between the two transactions works out to be $42.10 ($32.10 in lost savings plus $10 in transaction fees). Put another way, in order for you not to spend $70 plus GST of $4.90 you had to pay $17. Well, if you were to use a bank-based line of credit at about 10%, it would have cost you $7.49 to borrow the $74.90 for the year. If you were to use the loan for just 2 months, it would cost you $1.24 in interest. If you were to use a barter group, it would have cost you $10. The conclusion is simple, if you need cash flow and you are able to secure a bank loan, then it is more profitable for you to take that route.

Thirdly, depending on the bartering group you join, you may be significantly limited in your trading partners. Certainly more limited than if you were to use cash.

Benefits of joining a barter group include the exposure to the hundreds or thousands of existing business members via the membership directory. Members looking to barter will search these directories first and therefore you will have an advantage over your competition. As well, you don’t have to barter all your services, only those that you have capacity with and an provide at minimal costs. You still get exposure on the directory to all your services. By the way, many barter groups, such as North American Barter Exchange also have access to advertising on barter, which is a great way for you to turn your excess labour capacity into advertising to capture additional sales to fill that capacity.

By the way, the government considers a barter transaction to be taxable. They require you to record the values of the merchandise in your bookkeeping.

So, bartering can be a great way to capture sales and increase cash flow. But, if not used properly it can also reduce your profitability, in that the more you barter the more it takes from your profit to the point that too much bartering can bankrupt your business.
So before you rush into bartering, assess how it affects your business both in the short-term and in the long-term.

Baldo Minaudo, M.B.A. is a management consultant specializing in corporate growth and finance, author of the soon to be released The Banker Who Saved His Soul (http://www.thebankerwhosavedhissoul.com) and President of MetroActive Lifestyle Network, Canada’s largest business networking group (http://www.metroactive.org).  For Baldo’s other articles and business resources visit his website at http://www.baldominaudo.com.

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