Barter Brethren – Retail Barter Exchanges vs. Corporate Barter Transactions
I’ve received a lot of questions recently about retail vs. corporate barter and what is best for a particular business. The short answer is that things are not one size fits all, or to be more accurate, things are not one type of barter fits all transactions. For small to medium sized businesses that want to integrate barter as a strategic business tool, enrolling in a barter exchange is the best way to go. This approach is referred to as retail barter. For larger businesses that may have unique instances of needing to move large amounts of excess or slow-moving inventory, a corporate barter transaction is the best bet. Here are brief descriptions of how each work.
Retail Barter
The first step to conducting retail barter transactions is to join a barter exchange. These organizations are usually made up of between 200 and 10,000 members that conduct indirect barter transactions with each other by way of a credit/debit system. Clients of the exchange are simply agreeing to accept an additional form of currency for payment. Members are free to purchase any product or service within the network—they do not have to accept each other’s merchandise directly. Most exchanges are within a specific geographic area—a city or region—and are made up of members offering both products and services. It is not uncommon to have an extremely broad representations of companies in an exchange—from media organizations, construction companies, dentists, restaurants, attorneys, printers, hotels, ad agencies, graphic designers and plastic surgeons to small consumer-oriented businesses like dry cleaners, flower shops and so on.
There are currently about 400 retail barter exchanges in the U.S. and another 200 worldwide, most with around 1,000 businesses as members. In total, the business-to-business network of barter exchanges represents over 450,000 companies.
Corporate Barter
Larger companies trade goods and services through corporate barter, which is sometimes called accounts receivable (AR) barter. Like with retail barter, these types of transactions also take place through a third party barter company that acts as a broker. A corporate barter transaction is usually a good alternative to liquidation.
Here’s how it usually works: an asset that has lost value or is in excess is identified by a company. A barter firm takes a position in the client’s excess inventory or underutilized capacity and provides them with trade credits up to the full original value. The client then uses the trade credits to offset in full or in part budgeted cash expenses while meeting their current benchmark pricing.
By using the trade credits provided by a barter firm, a much higher value is restored to the client’s assets than would typically be the case using traditional liquidation methods.
In addition, the assets acquired by the barter firm are sold under terms and guidelines specified by the client. More specifically, non-competing channels are used to protect the brand and to ensure that cannibalization of sales does not occur.
The trade credits can be used by the company to purchase a wide range of products and services for which a company normally must pay cash, including advertising, printing, travel and entertainment, construction materials, etc.
Barter is a business solution. No two trade transactions are ever alike. The use of barter as a business tool can vary greatly depending on the needs, financial goals, assets and fulfillment desired by the company. There are many ways in which barter can be incorporated into a business model to increase efficiency and improve the bottom line.
- Bob
Using Barter to Finance Business Purchases
A desire to preserve cash is one of the most common reasons businesses use barter. Why spend money when it’s not necessary, right? A variation on the principle of using barter to preserve cash is using barter as a finance mechanism. When credit markets are tight, as they are now, how can a business without adequate cash in the bank make critical capital investments? One SOLUTION is barter finance.
This is how it works: a business joins a barter exchange and takes out a barter line of credit. This line of credit enables that business to buy goods or services from any other member of the barter exchange, be it advertising, printing, IT services, renovations or build-outs of new business locations. Rather than paying cash for the products or services received, the business that took out the line of credit is obliged to pay it back by delivering an equal value of its own products or services at market value to the other members of the exchange. And to help in that process, the exchange acts as a marketing tool by promoting the business to other exchange members in order to generate the additional sales. Where else can you borrow money where the lender actually helps you generate the new sales to pay back the loan?
In conjunction to preserving cash, this financing method has some other advantages over traditional financing, which means it shouldn’t just be thought of as a strategy employed during difficult economic times. It raises capital in a way that doesn’t dilute the stock holdings of shareholders; it results in immediate new customers from the exchange; and it frees up cash for the business to assist in further expansion, debt reduction or dividends.
Let me know if you want to know other specifics about how barter financing works or why it’s beneficial.
- Bob
About Bob
Bob Bagga is the President and Chief Executive Officer of BizXchange and is recognized internationally for his accomplishments in the barter industry. More...
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