Cash-Strapped? Try Bartering
Posted Apr 28, 2011 in Management
In the face of the ongoing credit crunch and sluggish cash flows, some small businesses are turning to bartering--the age-old exchange of goods and services--but with a modern twist.
Here's how it works for a laboratory: you join a barter exchange website and provide restorative services to dentists who are members of the same exchange. In return, you earn credits--or "barter dollars"--you can use to purchase products or services from any other exchange member. In effect, it's like trading a restoration for a paint job in the lab or maintenance on your delivery car.
If your workload is slowing down, this is an ideal way to use excess capacity and maximize your output while freeing up cash. "In any economy--but especially one like this one--bartering is a great solution. We're involved in at least two to four barter transactions per day," says Marc Daichman, co-owner, Asteto Dent Labs, Maplewood, New Jersey, who has bartered one million dollars' worth of products and services in the last 10 years.
For example, in just a few days' time, Daichman used his barter dollars--not cash!--for all of the following services and products:
Had the laboratory's leaking roof repaired, as well as ceiling tiles, carpet and leaky pipes replaced
Printed more than 50 promotional packets to hand out at a county dental society meeting
Ordered a catered lunch for employees
Renewed the laboratory's contract with its heating/air conditioning company
Purchased a gift certificate for a client
Paid for an outside telemarketing service
There are hundreds of bartering networks, ranging from large, publicly traded companies to smaller operations. Some networks have annual membership fees, and usually charge as much as 10% in cash as a transaction fee. For example, for every $1,000 barter dollars you spend, you have to pay a $100 fee. For tax purposes, barter is treated like ordinary sales and must be reported as income.
Advice for Beginners
Although it sounds like a relatively straightforward concept, in reality the on-line bartering process requires some work to learn how to use it most effectively. "Like anything else, there's a learning curve," says Daichman, who currently belongs to barterdepot.com and barterpays.com. "The first thing we did was to look at where our cash was going and decide which of those expenses could be replaced with barter dollars." He also offers this advice:
Set a limit on the number of bartering dollars you take in so you don't crowd out cash business or accrue barter dollars too quickly. "What could happen to new members--particularly those with a service (such as a dental lab) that can save customers a great deal of cash--is they will be flooded with barter business. Before they know it, they'll have $20,000 worth of credits--won't know where to spend all of it--and will have negatively impacted their cash flow," says Daichman, who sets his bartering limit at 4% to 8% of his total revenue.
Before you join an exchange, check to be sure the other members are providing products and services you know you could use. Once you're a member, continue to stay abreast of what's available so you can get the most value when spending your barter dollars.
Don't get into the wrong deals with the wrong people. Just like cash transactions, you don't want to pay inflated fees to other members or do business with dishonest people.
Although the barter ex-change assigns you a broker--who helps promote your laboratory business to other members as well as find the products or services you want to "purchase"--you still have to do your own homework. Says Daichman, "Don't rely too much on the broker; ultimately it's your responsibility to use the system in the best way for your business."
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