Trading Up

No cash? No problem. Here's how smart entrepreneurs use barter to help save money, create connections and grow their businesses.

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

The trainer coached him on business development and helped him set up a sales management plan for the business development manager of his CM IT Solutions 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, "and she provided me with marketing and sales coaching."

Barter Background

Barter--the cash-free exchange of goods and services--is a huge and long-established activity for businesses old and new, large and small. The International Reciprocal Trade Association (IRTA), a nonprofit organization of commercial and corporate barter exchanges based in Rochester, New York, estimated in 2001 that $7.5 billion in sales flows through commercial barter channels each year. The IRTA also estimated that figure was growing at 8 percent a year, and that 300,000 companies, including startups and Fortune 500 firms, 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 between firms, as in the case of Kazimir and the sales trainer. No one tracks direct barter, so no one knows how big it is. But, says Tom McDowell, executive director of the National Association of Trade Exchanges (NATE) in Mentor, Ohio, "The amount of direct barter dwarfs what we do on an organized basis."

Experts estimate that millions of companies, especially young ones, employ barter as a regular or occasional business tool. Barter provides one important benefit: helping companies dispose of excess 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 markets aren't developed enough to consume all their capacity.

At the same time, barter helps startups conserve cash because they don't have to lay out precious, hard-earned dollars for necessary goods and services. "Paying for business expenses with trade dollars leaves more cash available for the payment of strictly cash expenses," notes Malitz.

Barter also has some unexpected advantages. You may be able to fend off a creditor by offering excess inventory as partial or full payment for a debt. Likewise, if someone owes you money and you're having trouble collecting it, you may be able to barter part of the debt for useful services or products in lieu of cash.

Startups using barter report that it's an exceptionally powerful marketing tool. "One of the biggest benefits I've seen is referrals," says Mark Patrick Collins, 32, owner of Sign A Rama in Skokie, Illinois. The former aviation-industry employee, who started running his sign business in 2003, says trades for computers, networking services and even a condominium for him to live in have also helped the six-employee company's nonbarter sales: "The businesses you barter with refer you to other customers who will do cash business."

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This article was originally published in the February 2005 print edition of Entrepreneur's StartUps with the headline: Trading Up.

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