Barter (West's Encyclopedia of American Law)
The exchange of goods or services without the use of money as currency.
Barter is a contract wherein parties trade goods or commodities for other goods, as opposed to sale or exchange of goods for money. Barter is not applicable to contracts involving land, but solely to contracts relating to goods and services. For example, when a tenant exchanges the performance of various maintenance tasks around a house for free room and board, a barter has taken place.
(The entire section is 78 words.)
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Bartering (Encyclopedia of Small Business)
Bartering is the exchange of goods and services among businesses. This practice may be undertaken by single businesses, but in recent years many companies that choose to barter have joined organized bartering networks that offer memberships to firms in a variety of industries.
The popularity of bartering has surged over the past several years. Indeed, after making its first appearance in the modern U.S. economy in the late 1970s, its modest rate of growth suddenly accelerated in the late 1980s and early 1990s. By 1996 it was estimated that North American companies were bartering approximately $7.6 billion on an annual basis. The International Reciprocal Trade Association (IRTA) reports that the majority of this economic activity takes place within organized barter exchanges. According to the IRTA, the number of trade exchanges grew from under 200 in 1974 to more than 1,500 by 1998. During that same period, the IRTA estimates that the total value of goods and services traded by those exchanges rose from $45 million to over $1.5 billion.
Both large and small companies have contributed to this growth. Companies of all sizes have been attracted to its capacity for putting excess inventory and resources to good use, while small businesses in particular have embraced its usefulness as a viable cash alternative to cover basic expenditures in such areas as business travel, facility maintenance and/or improvements, marketing, and a whole host of other areas. "When it's properly done," one entrepreneur told Small Business Reports, "barter gives smaller businesses the clout of a much larger company."
Participating companies should be aware, however, that barter income is treated like regular income by the IRS. Companies that engage in bartering are expected to pay both sales tax and income tax on the goods and services they buy and sell (bartered goods and services are taxable in the year that they are credited). Of course, this status also means that bartering activity is tax-deductible for business expenses. But Office Systems 98 contributor Jean Buchanan urges small business owners to "consult with your tax advisor before trading business resources for personal services, such as massage or pet grooming services. You need to watch the implications to your personal income tax and potential mixed use of corporate funds."
ORGANIZED BARTERING NETWORKS
Barter networks or exchanges have emerged as a valuable tool for many businesses in recent years. Under these arrangements, member companies list goods and/or services that they are willing to make available for trade. When these goods or services are purchased by another company, the selling business receives trade credit based on the dollar value of the product or service offered. A business subsequently uses its trade credits to purchase goods or services offered by other members. "The exchange helps promote members' products and services through brokers (who act as an outside sales force for members), publications such as a barter directory and monthly classified ads listing specific items that client have to sell," added Small Business Reports contributor Susan Groenwald. "Many barter networks also have reciprocal agreements with networks in other cities, allowing members to trade with even more businesses."
Most observers agree that these networks can provide small business owners with potentially valuable options when it comes time to 1) pay debts during "cash-crunch" periods, and 2) collect from clients who are undergoing their own financial difficulties. But practitioners also contend that it helps a company's bottom line even when everybody's financial situation is stable.
JOINING A NETWORK Since organized bartering networks conduct a variety of administrative and record-keeping tasks on behalf of their members, they require businesses to pay for their membership. These costs can take a variety of forms, including commissions on completed barters (often 10 to 15 percent of the value of each transaction), one-time fees, annual fees (some networks charge no annual fee, while others may charge several hundred dollars), maintenance fees, or some combination thereof. Entrepreneurs who are intrigued with the idea of joining a bartering network, however, should be aware that pursuing such a course of action is likely to be a waste of time if his or her company is on shaky financial ground or less than committed to providing top services or goods. Some networks will reject applicants whose solvency is in question, and even companies that are accepted should anticipate close monitoring during their first few transactions. "We watch the first couple of trades very carefully," one bartering broker told San Diego Business Journal. "The newer the members, the closer we watch them." Some networks also assign established members to serve as mentors of sorts for new members.
NETWORKING WITHIN THE NETWORK "Bartering through an organized network is inherently more flexible than using cash because the network facilitates trade transactions among all its business members," stated Groenwald. Indeed, these networks are devoted to keeping members in touch with one another and facilitating transactions for the simple reason that they are reliant on trades for their very existence. Many networks are adept at keeping the lines of communicationnd thus the lines of barteringpen between their members. In addition to directories, newsletters, and the like, many networks sponsor membership gatherings in which representatives from various businesses can meet and talk. These "mixers" enable small business owners to establish valuable contacts and, in many cases, make transactions that benefit both themselves and other network members. "For weeks after [mixers], the vouchers triple," one network executive told San Diego Business Journal. "Deals are being done." Members of the barter network community also note that these face-to-face encounters tend to keep businesses focused on ensuring that they uphold their end of the bargain in barter agreements. A network member who provides substandard service to a fellow member will find that negative publicity can travel quickly in mixer settings.
In addition to serving as a facilitator of bartering transactions, barter networks usually provide a range of ancillary services to their members. In addition to providing recordkeeping on all transactions that go through the organization, most networks will provide regular statements (monthly, quarterly, annual) to members and provide them with necessary tax forms and information.
ADVANTAGES AND DISADVANTAGES OF BARTERING
Bartering has been hailed as a potentially valuable new addition to the strategic arsenal of small business owners for several reasons. Major advantages of barter exchanges include the following:
Employee compensationmall business enterprises are often strapped for cash when it comes to providing bonuses or perks to their employees, but barter exchanges are a potential avenue for companies that want to reward their workforce in some way. For example, some companies have established system within barter network so that employees can choose rewards from the offerings of other exchange members (within certain financial limits, of course). Under these arrangements, business owners set up "subaccounts" for individual employees to which barter credits owned by the business can be transferred. Employees thus have the opportunity to spend those credits anywhere in the exchange as they see fit.
Make use of excess inventory and used equipmentarter exchanges are often ideally suited for companies who want to unload excess inventory or old equipment (machinery, office furniture, etc.) while at the same time realizing some financial benefit. They can unload their extraneous goods and equipment in exchange for credits that can be used to procure valuable goods and services from other network members.
Business Travelncreasing numbers of small business owners are using bartering as a way to cut down on costs associated with business travel, especially as the number of lodging facilities engaged in bartering practices continues to grow.
Debt Collectionroenwald noted that small businesses often depend on prompt debt collection to maintain their very viability, "yet using an attorney or commercial service for collections takes both time and money, and writing off the debt is a no-win situation." Instead, she pointed out that many small business owners have begun to offer debtors the option of paying in merchandise or services, which are subsequently sold on the barter network with the credit going to the small business that would otherwise have been unable to collect anything. "In effect, the trade credits are equal to receiving the original debt in cash," wrote Groenwald. Some of this value is sacrificed to network transaction fees, but small businesses willing to use this option still receive a healthy percentage of the amount owed them.
Expand Customer Basearter exchanges are a potentially valuable tool for small businesses to contact and acquire new customers/clients. Many barter relationships eventually blossom into full-fledged cash business arrangements, as the companies in question develop trust and respect for one another.
Line of Creditartering networks can also serve as an alternative to more traditional means of financing for small businesses. "With this financing strategy, the barter network advances a set amount of trade dollars to your company against its projected future sales," said Groenwald. "Generally, the barter network [will] determine the trade-dollar amount your company is likely to earn back in a one-year period and base the advance on that amount." In addition, Groenwald pointed out that the interest that is charged on the line of credit may be paid in trade.
Cash Savingsarter exchanges enable small business owners to keep greater amounts of cash on reserve, an especially important consideration for new businesses.
Analysts do admit, however, that there are drawbacks associated with bartering as well. Some businesses that participate in bartering may find that the range of products or services available do not fully address their needs, or they may not be available when they are needed. Finally, as mentioned above, providing shoddy service or materials to clients or other network members will likely result in a drop in community and/or industry reputation, a development that small business owners should avoid at all costs.
EVALUATING BARTER NETWORKS
Small businesses interested in exploring membership in a local, national, or international barter exchange should consider the following factors when examining networks:
- Examine the roster of network participants/members to ensure that they have goods and/or services of value to your small business.
- Study the number of members and the frequency with which they trade. Some exchanges are much more active than others, depending on the trading philosophy of participants and the rules of the network itself.
- Examine the attractiveness of ancillary network services (consulting, member mixers, information newsletters, etc.) for your company.
- Study the size of the trades made within the network. Companies that are interested primarily in bartering expensive goods or services may find it difficult to find parties willing to engage in a barter agreement.
- Compare pricing structure and other financial aspects of the network to ensure that bartering makes financial sense for your business. Origination, monthly, and transaction fees can all vary significantly from network to network. In addition, entrepreneurs should attempt to gauge the level of sincere interest that the exchange has in helping their business. For example, some bartering networks limit the number of businesses offering the same goods or services so that benefits of membership are not diluted among too many companies.
- Study the geographic location of other businesses within the barter exchange. For some businesses, close proximity to other network participants is essential for membership to be financially viable.
Briggins, Angela. "When Barter is Better." Management Review. February 1996.
Broderick, Pat. " 'Let's Make a Deal' is the Slogan for These Firms: Merchants Exchange Brings Order to Old Practice of Bartering." San Diego Business Journal. June 23, 1997.
Brown, Carolyn M. "Bartering for Business: Business Owners Short on Cash Trade Goods and Services." Black Enterprise. April 1996.
Buchanan, Jean. "Business-to-Business Bartering: An Old-Fashioned Idea with Lots of Modern Potential." Office Systems 98. November 1998.
Green, Paula L. "The Booming Barter Business." Journal of Commerce and Commercial. April 1, 1997.
Groenwald, Susan. "Creative Trends in Trade." Small Business Reports. October 1994.
Katz-Stone, Adam. "Trading Off." Baltimore Business Journal. August 25, 2000.
Lunsford, Darcie. "New Tax Laws and Technology are Boosting Barter Business." South Florida Business Journal. December 12, 1997.
Bartering (Encyclopedia of Business)
Bartering is the exchange of goods and services without the use of currency. Although bartering has been used in commercial and private transactions since ancient times, its appeal notably increased in the waning years of the 20th century. Surprisingly, bartering has proved on a worldwide basis to be not only a complement to sophisticated marketplace economies but also a means of survival in moribund economies. In the United States for instance the dollar value of bartered transactions grew at an annual rate of about 15 percent in the ten years following 1988. Conversely, in degraded economies such as Russia and its former republics bartering plays an important role in nearly 75 percent of the business transactions involving major companies. The term "countertrade" can be used synonymously with "barter" but "countertrade" most often describes international barter.
Barter is a popular method of exchange in societies or social situations marked by a low money supply. Children may trade or barter their goods with one another and bartering was popular in early rural America. But bartering is also on the increase in developed marketplace economies with a ready supply of capital such as the United States. According to the International Reciprocal Trade Association (IRTA) over $7.5 billion in sales is transacted each year in the United States by the commercial barter industry. Over 300,000 companies, mostly small businesses, use commercial bartering services annually and the growth of the commercial barter industry is outpacing the rate of growth of America's gross national product.
At the commercial level, bartering is an inexpensive method of financing operations as it is based on the exchange of less productive assets for goods and services of more value. It is often easier to barter excess inventory or "downtime" than it is to exchange these goods or services for hard currency. The most important advantage of bartering, however, is its conservation of cash, which results in greater liquidity. Bartering can also be used advantageously by businesses that are seasonal in nature such as resort hotels. A bartered hotel room is more cost effective than an empty one. Bartering thus enhances liquidity and allows businesses to capitalize on unproductive assets and spare or unused capacity.
There are, however, a number of drawbacks to bartering. Bartering can have a high transaction cost caused by potential traders expending time, money, and effort in search of one another. A related problem is the double coincidence of wants." Any two individuals wanting to trade must have the exact goods each other wants. If a furniture maker wants to buy books, that person must find a bookseller who wants to buy chairs," according to economist R. Glenn Hubbard. Bartering also lacks a common unit of exchange and standardization. Unlike money, a commodity with value in one community may not be quite as valuable in another. Also an ounce of gold from one mine is the same as an ounce of gold from another but a pair of shoes may vary in quality from one cobbler to another. In these regards bartering is not nearly as efficient as a moneyed economy, as money acts as a medium of exchange, a unit of account, a store of value, and a standard of deferred payment. For these reasons bartering may serve as a complement to a sophisticated economy but certainly not as an alternative. Many of the above problems with bartering, however, have been alleviated by computerized barter exchanges which efficiently match the respective client needs while offering standardized "trade dollars" as a unit of account.
The growth of bartering in the United States is due to these barter companies or barter exchanges. In 1998 there were approximately 600 such companies00 barter exchanges that act as clearinghouses for the exchange of goods and services amongst their clients and 100 corporate trade brokers that exchange trade credits for assets, and goods and services for part trade and part cash. Barter companies or barter exchanges provide an arena in which members exchange goods and services through pure barter or a combination of barter and cash. The most important function of a barter exchange is to match the needs of potential traders. The barter exchange earns its income from start-up membership and renewal fees and from commissions based on a percentage of the gross value of each transaction. The fee is usually between 5 and 10 percent. Some barter exchanges also charge a monthly administrative fee.
The operation of most barter companies is similar to that of credit card companies. Clients are issued a card and their barter accounts are credited or debited according to each transaction. Clients are made aware of available goods and services for trade through membership directories, trade brokers, fax-back sheets, and the Internet. Traders must receive authorization from the exchange and clients receive statements detailing their account activity for the previous month.
A trade dollar is the unit of account used by barter exchanges. As a unit of account or unit of exchange, trade dollars allow for the efficient recording of trades and the measure of debt and credit of each exchange member. If a trade between two members is not equal or reciprocated, trade dollars can be credited to an account for future use. Many of the regulations governing these barters are based on provisions of the Uniform Commercial Code. This is a model code governing commercial transactions in the United States. It especially applies to the sale of goods in the normal course of trade and negotiable instruments.
Generally it costs $200 to $500 to join a barter exchange. Clients are assigned a trade broker who is responsible for arranging trades for the client and keeping track of the trade dollars in their account. The broker makes a commission on each transaction and there may be a monthly maintenance fee of up to $30. Black Enterprise magazine detailed how bartering helped the career of Jamila Swift, a New York graphic designer. Swift joined Barter Advantage, Inc. in hopes of maintaining business liquidity, expanding her client network, and finding new and less expensive sources of needed goods and services. Swift accumulates trade dollars by designing letterheads and brochures for fellow barter exchange members. Her account of trade dollars is likewise debited when she makes use of goods and services proffered by fellow members. These goods and services include such things as dining out, medical care, automobile repairs, and hotel reservations. "It's another opportunity to get your business out there and get more exposure," Swift told Black Enterprise. She also claimed a 5 to 10 percent increase in income from bartering. The Journal of Accountancy also presented a barter exchange scenario: A printer uses his press downtime to do a $3,000 printing job for a fellow barter exchange member; with $3,000 in trade dollars the printer hires a landscaper to do work around his building; the landscaper uses the $3,000 in trade dollars to advertise his business on the radio; the radio station uses the $3,000 in trade dollars to purchase airplane tickets as part of a promotional campaign. All participants in these various transactions are of course members of the barter exchange, as trade dollars cannot be used outside of the respective exchange.
While there are no tax advantages or tax disadvantages to bartering there are tax consequences. "A trade dollar and a cash dollar are the same in the eyes of the IRS," according to Robert Meyer, publisher of Barter News magazine. Under the Tax Equity and Fiscal Responsibility Act of 1982, barter exchanges are legally designated custodians of the financial records of their members, who of course must pay taxes. As such, barter exchanges are third-party record keepers the same as credit card companies, banks, and stock brokerages and are required to file Internal Revenue Service (IRS) 1099-B forms which list the barter income of each client. According to the IRTA, barter income should be viewed as cash income and bartering should be considered a marketing or financial toolot a tax tool. Barter income accrues whenever trade dollars are credited to an account from a transaction resulting in the "sale" of goods or services. The value of trade dollars is considered to be gross income for the tax year in which they are credited to a barter account. Unspent trade dollars are thus a tax liability because they are taxed as income when they are received. Business-related barter purchases are of course generally tax deductible and, contrary to popular myth, membership in a barter exchange does not automatically target a business or person for an IRS audit. In a noted 1997 case, pop artist Peter Max was charged by the IRS with tax fraud for bartering his art for services and property that he did not report as income. Max was charged with cheating the IRS out of taxes on $1.1 million worth of bartered art sales. The artist eventually pleaded guilty to single counts of conspiracy and tax evasion.
Bartering is often a necessity in societies where the money supply is deficient. This was true on the American frontier where agricultural and other goods such as liquor, furs, hardware, and firearms were readily traded. Although these goods were often bartered at stores, the accounts were kept in terms of dollars. A trapper could trade furs for shot and powder at a trading post but the storekeeper entered the transaction in his or her books in terms of dollars.
Bartering also becomes increasingly popular when economies undergo rampant inflation. Why hold on to money which decreases in value as opposed to hard goods which rise in value? That was the case in Russia in 1992 when that transitional economy began suffering from hyperinflation. As a result, according to the Wall Street Journal, by 1997 50 percent of industry sales in Russia were being conducted through bartering. In the city of Tatarstan, for instance, a truck factory settled its tax bill with 600 trucks that the company conveniently parked on the front lawn of the local administrative building. And in 1998 in the city of Kostroma, a sock manufacturer settled a tax bill with 600 pairs of wool socks that were turned over to the local police. Bartering also reaches down to the everyday consumer level with a local movie house accepting two eggs as the price of admission. In a very circuitous example the Wall Street Journal also told about a textile manufacturer in Kostroma who paid his electric bill with 400 wool blankets. The KostromaEnergo company donated the blankets to a children's camp and then took the deduction from their taxes. The original wool for the blankets came to Kostroma from a textile factory in Uzbekistan as part of a wool-for-machinery trade. Economists blame the growth of bartering in Russia on the void that followed the collapse of its central planning system. There were no managers skilled in marketing or distribution to fill this void. Another explanation is the shortage of cash which created a liquidity crisis. There is simply not enough currency to pay wages and bills, leaving bartering as the only alternative. Bartering, which began in Russia as a bad habit, has turned into a crippling addiction for which a cure has yet to be found.
The leading promoter of bartering in the United States is the International Reciprocal Trade Association (IRTA). The association was founded in 1979 to foster the common interests of those involved in commercial barter in the United States and worldwide. Its goals are to promote bartering as a legitimate and responsible form of commerce. It has also instituted a common code of ethics and a peer review regulatory system. The IRTA was also instrumental in passage of the 1982 Tax Equity and Fiscal Responsibility Act.
Brzezinski, Matthew. "Where Cash Isn't King: Barter Lines Pockets in Ex-Soviet States." Wall Street Journal, I May 1997, A14.
De Lisser, Eleena, and Rodney Ho. "Barter Exchanges Say Future Looks Promising." Wall Street Journal, 12 November 1997, B2.
Higgins, Andrew. "Twilight Economy: Lacking Money to Pay, Russian Firms Survive on Deft Barter System." Wall Street Journal, 27 August 1998, Al +.
Hubbard, R. Glenn. Money, the Financial System, and the Economy. Reading, MA: Addison-Wesley, 1995.
International Reciprocal Trade Association. "IRTA: The International Reciprocal Trade Association." Chicago: International Reciprocal Trade Association, 1998. Available from www.irta.net.
Kreuze, Jerry G. "International Countertrade." Internal Auditor, April 1997, 42-47.
Malitz, Phyliss. "The Business of Barter." Journal of Accountancy 185, no. 3 (March 1998): 72-74.
National Association of Trade Exchanges. "National Association of Trade Exchanges." Cleveland: National Association of Trade Exchanges, 1999. Available from www.nate.org.
Parks, Paula Lynn. "Capital Ideas: Bartering Bonanza." Black Enterprise, February 1999, 44.
Satov, Tamar. "Fair Exchange." CA Magazine, April 1997, 14-19.