Trading Up

Avoiding Barter's Bite

There are some things smart barterers don't do. One is converting a cash customer to a barter customer. "A trade exchange 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 in barter, according to accepted barter wisdom, you may be abusing the technique. "It's great for extra business, but it can't be the only business you have," McDowell warns.

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

Nor can you expect to pay all your suppliers in barter. Barter is good for many kinds of expenses, from coffee services and window cleaners to incentive travel and restaurant meals. But you can't refill your inventory with barter, and you can't pay your utilities, taxes or, most likely, your rent. "There are tons of things you can do with barter," says Malitz, "but it's not going to be for your core expenses."

Experienced barterers generally agree with these warnings, but if there's one universal bit of advice about barter, it's that creativity and innovation are rewarded more than naysaying and excessive caution. Edward Posherstnik, owner of 3-year-old printer IBG Creative Services, says barter--especially referral business--has been key in expanding his company, and he has approached it creatively. He has obtained design services in exchange for the chance to post ads or place business cards and brochures on his company's website or in its Old Bridge, New Jersey, office. He also lets a local art teacher hold lessons in the IBG offices. "Since she is also skilled in marketing techniques, she provides research and marketing services to our company [in return]," says Posherstnik, 45. "We are not limited to anything. IBG Creative Services is willing to consider any barter offer."

Barter's Future

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

McDowell adds, however, that the growth of online auction services such as eBay has hurt barter by giving companies an easier way to turn excess inventory into cash. Attempts to harness the internet for barter by setting up online barter exchanges have been universally unsuccessful, he says, despite a number of well-financed efforts.

Meanwhile, barter remains a well-established practice that startups find especially useful. "It worked out really well," Kazimir says of his foray into direct barter. "We built [our barter partner] a nice site that she's very happy with, and I'm pleased with the training and plan that I got from her. It's been win-win."

The Swap Team

Ready to engage in organized barter? You have several hundred commercial exchanges to choose from. Local exchanges should probably be the first choice for most startups, because new companies usually have a greater need for local services and goods, says Krista Vardabash, executive director of the International Reciprocal Trade Association (IRTA). You can find online directories of barter exchanges at the IRTA's website, as well as at the site of the National Association of Trade Exchanges (NATE).

Look for an exchange whose membership includes companies that supply products and services you need, and that are likely to be customers for your offerings. Costs are also something to consider. Most exchanges charge $300 to $700 to join, plus a 10 to 15 percent fee on each transaction and a monthly membership fee of $20 to $30, says Tom McDowell, NATE's executive director. Check for a guarantee that refunds your initial membership fee if you don't get value out of the exchange within a few months.

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

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

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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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