Barter Your Way to Success No cash? No problem. Here's how smart entrepreneurs use barter to save money and grow their businesses.

When Rich Kazimir was getting his IT services firm off theground in early 2004, the former engineer knew he and his staffneeded sales training, but he didn't have much cash to pay forit. The solution? The 47-year-old entrepreneur offered to swapservices with a local business coach.

The trainer coached him on business development and helped himset up a sales management plan for the business development managerof his CM ITSolutions franchise in Flemington, New Jersey. In return,Kazimir got the trainer online. No cash changed hands. Instead,both parties contributed what they could, and got what they wanted."We built her a nice website," Kazimir says, "andshe provided me with marketing and sales coaching."

Barter Background

Barter--the cash-free exchange of goods and services--is a hugeand long-established activity for businesses old and new, large andsmall. The International Reciprocal Trade Association (IRTA), anonprofit organization of commercial and corporate barter exchangesbased in Rochester, New York, estimated in 2001 that $7.5 billionin sales flows through commercial barter channels each year. TheIRTA also estimated that figure was growing at 8 percent a year,and that 300,000 companies, including startups and Fortune 500firms, would participate in trading exchanges in 2002.

The numbers reported by barter exchanges are minuscule, however,compared with the amount of barter that occurs directly betweenfirms, as in the case of Kazimir and the sales trainer. No onetracks direct barter, so no one knows how big it is. But, says TomMcDowell, executive director of the National Association of TradeExchanges (NATE) in Mentor, Ohio, "The amount of direct barterdwarfs what we do on an organized basis."

Experts estimate that millions of companies, especially youngones, employ barter as a regular or occasional business tool.Barter provides one important benefit: helping companies dispose ofexcess inventory by trading it for valuable goods or services,notes Phyllis Malitz, a CPA and barter expert in Wilmette,Illinois. That can be especially useful for startups whose marketsaren't developed enough to consume all their capacity.

At the same time, barter helps startups conserve cash becausethey don't have to lay out precious, hard-earned dollars fornecessary goods and services. "Paying for business expenseswith trade dollars leaves more cash available for the payment ofstrictly cash expenses," notes Malitz.

Barter also has some unexpected advantages. You may be able tofend off a creditor by offering excess inventory as partial or fullpayment for a debt. Likewise, if someone owes you money andyou're having trouble collecting it, you may be able to barterpart of the debt for useful services or products in lieu ofcash.

Startups using barter report that it's an exceptionallypowerful marketing tool. "One of the biggest benefits I'veseen is referrals," says Mark Patrick Collins, 32, owner ofSign ARama in Skokie, Illinois. The former aviation-industryemployee, who started running his sign business in 2003, saystrades for computers, networking services and even a condominiumfor him to live in have also helped the six-employee company'snonbarter sales: "The businesses you barter with refer you toother customers who will do cash business."

Barter's Downsides

But barter isn't better in every way. One frequent complaintis that businesses with something to trade can't quickly find abarter partner for a specific product or service. "That is adisadvantage," acknowledges Joan Varner, co-owner of Illinois TradeAssociation, a barter exchange in Niles, Illinois. "Youmay have to be willing to wait."

Contrary to popular belief, barter carries no inherent taxadvantages. The IRS regards barter exchanges as the same as cashdeals, says IRTA executive director Krista Vardabash."It's taxed just like income," says Vardabash."One barter dollar is equal to one U.S. dollar."

Commercial barter exchanges work closely with the IRS. Membersof such exchanges receive 1099 forms at the end of the year toreport their barter transactions, so the appropriate taxes can belevied. With direct barter, it's different. Although taxes aredue on direct trades, collecting them is another matter. "[TheIRS] knows they can't control that," says Vardabash, whoworks closely with the IRS on policing exchange barter.

Barter isn't for every company, either. Hospitality andmedia goods and services are the biggest categories of commercialbarter. Items such as unoccupied hotel rooms and unpromised radioairtime are ideal barter goods, because they're highlyperishable--if no one uses them, they're wasted. So if youeither provide or consume travel, entertainment, advertising orsimilar goods and services, you're a good candidate for barter."The businesses that do best in barter are retail, service andprofessional--anybody with a disposable commodity that has no shelflife," says McDowell.

Many other goods and services, from carpet cleaning to newautomobiles, are actively traded on exchanges and betweendirect-barter customers. If, however, you provide only onespecialized product, such as a part used in one machine made by onemanufacturer, you're not a good candidate for barter, since youwon't find many--or any--takers for what you are offering. Thesame goes for highly specialized services.

Barter How-To

If you're interested in barter, you must first decidewhether to try direct barter or a barter exchange. Experts likeMalitz recommend exchanges for their convenience and flexibility.These networks act as brokers connecting hundreds or thousands ofbusinesses in a system that allows them to exchange their offeringsfor barter dollars, which can in turn be swapped for goods andservices offered by other members. The exchange adds value byassigning you a barter broker who can help you locate the barterproducts and services you need. In addition, the exchange keepstrack of the paperwork, collects fees on the transactions to allparties and reports to taxing authorities.

Direct exchanges sound comparatively simple--you scratch anotherbusiness owner's back, and he or she scratches yours. Nopaperwork or fees are involved and, in the vast majority of cases,taxes are not paid. No wonder direct barter is overwhelmingly morecommon than commercial barter. It does have its challenges,however.

The first is finding someone who has what you want, wants whatyou have and is willing to barter for it. Vivien Teo, a 28-year-oldpartner in New York City startup Vroom Media GroupLLC, ran into a lot of skepticism and blind alleys when shelooked for chances to barter her PR and brand marketing firm'sservices. "When we tried approaching some businesses aboutbartering, they were not very excited about it," she says. Teokept at it and eventually found suppliers willing to barter forphotography, and web and logo design. She even found a spa thatwould swap PR work for free treatments, which Teo has used both topamper herself and to reward clients.

Even if it takes a while to find a willing trader, don't betoo quick to jump into the deal. The second challenge of directbarter is not letting others take advantage of you. You don'twant to trade your goods or services for something of lesser value.Knowing your own margins is essential to bartering effectively,Vardabash says. Knowing your barter partner is equallycritical.

Kazimir says he was only comfortable with hiswebsite-for-training swap because he took the time to get to knowhis prospective barter partner. The two held hour-long, semiweeklymeetings for two months to discuss what their expectations were andhow they would price their respective contributions. "I'drecommend bartering with someone you know," Kazimir concludes."And I'd look for something, like references, that makesyou feel you're dealing with somebody trustworthy."

Avoiding Barter's Bite

There are some things smart barterers don't do. One isconverting a cash customer to a barter customer. "A tradeexchange never takes away a cash customer," McDowell says.Barter is for excess capacity and unused inventory, experts stress.If you're doing more than 5 percent of your sales volume inbarter, according to accepted barter wisdom, you may be abusing thetechnique. "It's great for extra business, but itcan't be the only business you have," McDowell warns.

In direct barter, you can, however, convert barter customers topart-cash, part-trade. That's something Collins has done, sofar without com-plaint, with his formerly pure-barter customers."In the beginning, a couple of sales were 100 percenttrade," he says. "I found I can't do [that]. I haveto pay materials and labor costs in cash, and my overhead is all incash, too."

Nor can you expect to pay all your suppliers in barter. Barteris good for many kinds of expenses, from coffee services and windowcleaners to incentive travel and restaurant meals. But youcan't refill your inventory with barter, and you can't payyour utilities, taxes or, most likely, your rent. "There aretons of things you can do with barter," says Malitz, "butit's not going to be for your core expenses."

Experienced barterers generally agree with these warnings, butif there's one universal bit of advice about barter, it'sthat creativity and innovation are rewarded more than naysaying andexcessive caution. Edward Posherstnik, owner of 3-year-old printerIBG CreativeServices, says barter--especially referral business--has beenkey in expanding his company, and he has approached it creatively.He has obtained design services in exchange for the chance to postads or place business cards and brochures on his company'swebsite or in its Old Bridge, New Jersey, office. He also lets alocal art teacher hold lessons in the IBG offices. "Since sheis also skilled in marketing techniques, she provides research andmarketing services to our company [in return]," saysPosherstnik, 45. "We are not limited to anything. IBG CreativeServices is willing to consider any barter offer."

Barter's Future

The future for barter is unclear. While the trend-trackers atthe IRTA report that barter is growing strongly in terms ofexchanges, members and volume, the NATE's 2004 report showed amuch smaller amount of business flowing through barter than pastreports have shown. McDowell says this is mostly because the NATEgot more accurate information about franchise barter exchanges thatrevealed they weren't doing as much volume as expected.

McDowell adds, however, that the growth of online auctionservices such as eBay has hurt barter by giving companies an easierway to turn excess inventory into cash. Attempts to harness theinternet for barter by setting up online barter exchanges have beenuniversally unsuccessful, he says, despite a number ofwell-financed efforts.

Meanwhile, barter remains a well-established practice thatstartups find especially useful. "It worked out reallywell," Kazimir says of his foray into direct barter. "Webuilt [our barter partner] a nice site that she's very happywith, and I'm pleased with the training and plan that I gotfrom her. It's been win-win."

The Swap Team

Ready to engage in organized barter? You have several hundredcommercial exchanges to choose from. Local exchanges shouldprobably be the first choice for most startups, because newcompanies usually have a greater need for local services and goods,says Krista Vardabash, executive director of the InternationalReciprocal Trade Association (IRTA). You can find onlinedirectories of barter exchanges at the IRTA's website, aswell as at the site of the National Association of Trade Exchanges (NATE).

Look for an exchange whose membership includes companies thatsupply products and services you need, and that are likely to becustomers for your offerings. Costs are also something to consider.Most exchanges charge $300 to $700 to join, plus a 10 to 15 percentfee on each transaction and a monthly membership fee of $20 to $30,says Tom McDowell, NATE's executive director. Check for aguarantee that refunds your initial membership fee if you don'tget value out of the exchange within a few months.

Given the costs, it makes sense to do due diligence on yourprospective exchange. Talk to other members. Run a credit report onthe exchange. Not all exchanges are run equally well. Some exchangeowners skim off the most desirable barters for their own use, orissue so much barter credit that the exchange collapses."Check out who you're doing business with," urgesMcDowell, "just as if it were a cash customer."

Mark Henricks writes on business and technology for leadingpublications and is author of Not Just a Living.