Barter is the most topical buzz-word in business right now due to the
bad economy and the dire need for American companies that are
going to foot the tax bill for the bail-out to be more
creative. Competition is greater than ever, credit is still very
tight, and people are more reluctant to spend on non-essentials.
Unemployment creeping dangerously close to 10% isn't helping
calm the mayhem either.
So, what is barter and why is there such a buzz about
it?
Barter, simply put, is the cashless exchange of
goods and services between parties. An example of a barter would be
a florist exchanging a bouquette of flowers for an oil change at a
car repair shop.
But why do companies barter, and how does it
work?
Let's build on the above example. The florist
has already bought and paid for the flowers (they are in her
inventory as a perishable item.) What does it really cost her to
put together a $35 bunch of flowers? Her cost (cost of goods) is
probably about $15, if it was any higher, she would not have
the gross margin available to cover her overhead (rent, insurance,
marketing, salaries, etc.) So, if she trades that
$35 bunch of flowers for an oil change she would have paid $35 cash
for, here are her benefits:
1. She just saved herself $20 in cash
2. She turned over her inventory
3. She potentially made a new customer
4. She has potentially marketed herself to a new area
How does this benefit the mechanic? It helps him in much the same
way. He saves himself the cash outlay for the flowers, she becomes
a new customer, she may recommend him to her friends and
associates, and he filled some dead or down time he had.
That sounds like quite a laborious way to save $20
cash, right?
So, why is there such a buzz about bartering, if
companies are saving so little? The above scenario was an example
of traditional barter or what is called reciprocal
trading (just like the old days, two parties trading with each
other.) Even though it seems a small saving, it's actually
almost a 50% cost reduction. What if you could save 50% on other
things? Construction work, landscaping, printing, perhaps put on a
new roof, take a vacation, do more advertising, or repave your
parking lot?
The challenge of traditional barter, and the Merchants Barter
Exchange (MBE)
solution.
Any smart business owner would love to be able to save 50% on their
cash expenses. The problem with traditional barter are:
1. Finding a match - how do you find a roofer that wants $5000 of
flowers?
2. Timing, if you do find a roofer, do they want the flowers
now?
3. How do you ensure the trade happens?
Horror stories abound with people trying to barter with others and
not getting a fair deal: either they give their stuff and the other
party doesn't reciprocate, or they short them, or it simply
doesn't happen as planned. Obviously, there is no benefit to
something that doesn't happen correctly, but how do you ensure
it is fair for all concerned? Even using an organized barter
company from the last century had its problems (inflated pricing,
cash-blends negating the savings benefits, cash business converting
to barter, and under the table deals.)
That was all until Merchants Barter Exchange
(MBE) came on the scene in 2000, setting a brand
new standard for organized bartering and changing the industry
forever. Since then, every other barter company of any size has
been trying to copy the ethics and standards of MBE, which thus far
is the only American barter company to be able to do large scale
bartering (like $100,000 of printing, $70,000 of paving work,
$30,000 worth of appliances entirely on trade with no
cash.)
So what does MBE do
differently?
By acting as both the bank and the co-ordinator
between transactions, MBE is able to control how trades are
handled. In simple terms, demand for goods and services comes into
the MBE central brokerage from the members around the US. From
there, the barter experts co-ordinate where that demand goes.
Nothing is traded directly, so there are none of the challenges of
one party going first, then not getting stuff in return. The MBE
brokers keep track of everything via their sophisticated software
platform, transferring barter dolars as credits for the equal cash
value of trades.
It sounds very simple, and MBE makes it look so, but be warned:
many companies have tried to copy their model and failed, losing
hundreds of thousands of dollars. American Express was involved at
the same time as MBE started in 2000 with an online barter group
called BigVine.com. By 2003 they had entirely blown a $800m budget.
Because of the new standards MBE are setting, many older barter
companies are actually going into decline right now, rather than
expanding.
What are the tax
implications?
Obviously, any form of commerce has the interest of Uncle Sam. Back
in 1982, an act of Congress deemed all barter companies the same as
banks and credit card companies ("Third Party Record
Keepers") as such they must issue 1099b forms to members each
year, and all transations are treated the same as cash for
reporting needs. See here for IRS details
( http://www.irs.gov/taxtopics/tc420.html
).
All in all, barter - when done correctly via an organization like
MBE - can be an incredibly positive business and marketing tool for
any business big or small. The main point, do your research,
don't be rushed in to a direct trade, and make sure they adhere
to the MBE bartering standards: can you buy first? Are all
transactions 100% on trade (no cash element for parts, etc.)? Are
all prices 100% the same as cash? Are you only being charged when
you buy? (if you are being charged selling and buying, where's
the motivation on the barter company to help you spend?)
Barter is a lot of fun, and you don't have to be in business to
enjoy it - remember when you used to trade baseball cards? It's
basically the same thing. In that scenario though, can you imagine
trading your baseball cards for a new car?
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About Merchants Barter Exchange
Merchants Barter Exchange is the only national trade exchange that works entirely without part-cash deals and wholly on trade dollars. The New Jersey-based company was founded in 2000 and in 2005, the company expanded to provide a national licensing program to broaden the public’s understanding of the benefits of barter to businesses nationwide. Merchants Barter Exchange currently operates in 31 states with 17 new brick and mortar offices scheduled to open throughout the remainder of the year. For more information, visit www.merchantsbarter.com or call (800) 822-7204.
