The Beauty of Bartering: A Smart Way to Start and Grow Your Business
Don't have the cash you need to pay vendors and employees? Bartering could be the answer.
The following excerpt is from Entrepreneur's book Finance Your Business. Buy it now from Amazon | Barnes & Noble | iTunes
When money's tight, how can you grow your business? Trade for the items you need, say trading professionals and the hosts of A&E's 2012-2014 original trading show Barter Kings. Traders Steve McHugh and Antonio Palazzola have their own approach to trading up to get what they want -- on the premiere episode, the pair worked their way up in a series of six trades from a framed gold Elvis record to a powerboat.
While we might not all have the skills to trade up for more valuable items, barter is definitely a useful tool for business owners looking to stretch their budget. In this tough economy, barter has boomed, and online barter exchanges that help you find items to barter for are mushrooming.
How can entrepreneurs barter for what they want without spending a dime, even if they don't have an item of equal value to trade? Here are seven tips from McHugh and Palazzola:
1. Don't bring cash. Palazzola has a strict policy of leaving his wallet at home when he goes to a trade. That way, when a trader wants to "even out" a trade by having you add in a few hundred dollars in cash, you can simply say you have no cash available. It's a straight trade or nothing.
2. Look for the soft spot. The pair chat up traders to find out why they're selling. For instance, one trader needed to get rid of his son's dirt bike because the boy had broken his leg, and his wife was mad. Another had made a vow to his wife not to ride motorcycles as long as they had kids at home, so the bike had to go. When you know the trader has to ditch their item, you're in a stronger position to negotiate and trade them a slightly less valuable item.
3. Be stoic. Never let a trader see you're crazy hot to get an item. Stay impassive, and act like you don't care to make the best deal.
4. Leave some mystery. When you're listing an item to trade, don't advertise all the details. Post a good photo, and leave it with a basic description so the prospect has to call you to find out more.
5. Craigslist rules. Both hosts recommend the popular site as the top place to scan for trades. Not everyone posting on there will be savvy about how much their item is really worth, giving you an opening to potentially trade an item.
6. Know your item's value. You can't come out on top in a deal if you're not sure what both the item you're trading and the one you're getting are really worth. Often, traders will price items with sentimental value in mind or still have the original retail price in their heads, both of which are irrelevant to the resale market. Bring an experienced trader with you, or have a smartphone handy for checking eBay to establish what this item is selling for today, in its current condition.
7. Watch out for scams. There are plenty of shady traders out there, Palazzola says. If you smell something fishy, run the other way.
A fish story
What if the product you bring to the table is wild Alaska salmon, halibut and lingcod? How do you find a web designer who's willing to take payment in fish?
This was the issue faced by Mack Chaffin, co-owner with his wife, Diane, of The Elfish Co., a fish distributor. Although he did a decent business selling fish through his website, at farmers markets and to a handful of restaurants and grocery stores, Chaffin wanted to expand.
But marketing requires capital that the Dewey, Arizona-based businessman didn't have. So at the end of 2011, when he discovered The Barter Group, a trade exchange of 450 small businesses in Greater Phoenix, he leapt at the chance to join. Entrepreneur cast a line to Chaffin to find out more, and the following is an excerpt from that interview.
Entrepreneur: Why join a bartering organization?
Mack Chaffin: Until now, the farmers market in Phoenix had been my primary source of revenue. I've been looking for ways to expand, to get the word out that we're here. But we don't have the kind of capital needed for advertising. Most of our capital has been used to purchase the freezers where we store our fish and other items to get the business established.
With the current economy, we can't exactly go to a bank for a loan. They're looking for somebody who's been in business a whole lot longer and has collateral. So when I learned about The Barter Group, it was perfect. You don't have to make a huge capital outlay every time you need services. You just swap something.
Entrepreneur: How does the group work?
Chaffin: When an individual wants to purchase some fish from us, what I get in return are "barter dollars," which are kept in my Barter Group "bank account." And then when I need to purchase a product or service, that credit will be there for me to use. It's much easier to do this than having to purchase the fish and still come up with other capital to pay a marketing company for their services.
Entrepreneur: What are the fees involved?
Chaffin: The Barter Group charges 6 percent cash on each transaction as well as a monthly maintenance fee of $10 in cash and $10 in trade. We were lucky enough to get a free membership due to a promotion going on when we joined.
Entrepreneur: What services do you plan to barter for?
Chaffin: We're hoping to do web design, branding, printing, promotional items like T-shirts and hats, print and radio advertising, and strategic marketing, and to expand our social media reach.
It's almost tripling what our marketing budget was before. All you're spending is inventory. If we were to spend $12,000 on marketing, we'd be taking that in cash out of our pocket.
Entrepreneur: Why not just barter with other businesses on your own?
Chaffin: Going through The Barter Group is much easier than calling somebody out of the phone book and saying, "I need you to do this, and by the way, would you like to take some salmon as partial payment?" You don't know whether that would insult them, or they don't like fish, or they just don't want to barter.
Be aware of labor and tax rules
When Rebeca Mojica, owner and "creative guru" of Chicago jewelry company Blue Buddha Boutique, announced on Facebook that her shop was moving in 2011, customers responded, "How can we help?" and "I love to pack boxes!" That enthusiasm led her to "hire" three customers to help staff a booth at a craft show. The customers could opt to receive an hourly wage or be paid the equivalent of time-and-a-half in jewelry and supplies. All of them went for the latter, saving her $800 -- the difference between what it would cost her to hire them at an hourly wage and the cost of materials to make the jewelry.
"It's not a huge number, but for a four-day show, with a total booth staff of six, it makes a difference to my small business's bottom line," says Mojica.
While it's not unusual for small businesses to have friends or even enthusiastic customers who do what they can to see the business succeed, it's important to ensure that you don't inadvertently fall out of compliance with labor laws, says labor and employment attorney Truth Fisher of Advisors Law Group in Miami. In general, under the Fair Labor Standards Act (FLSA), individuals can't volunteer services to for-profit, private-sector companies unless the activity benefits the employee, such as in the case of an unpaid internship. However, even such internships must pass strict Department of Labor criteria, Fisher says.
According to the U.S. Department of Labor, a company with annual revenue of less than $500,000 is exempt from FLSA requirements. In addition, unless the product is related to providing room and board, it's not a wage and isn't subject to federal payroll taxes. States may differ in their interpretations, however. Fisher says the value of the product used as compensation should be at least the number of hours worked times minimum wage. Also, the employer may be liable for any injuries that the individual sustains while working.
"We advise all of our clients doing this," she says, "to have these employees covered by workers' compensation insurance."