Michael Becce knew he could successfully publicize the Summerland Group's innovative office workstation products, but the company couldn't afford his price. So Becce won them a lengthy feature spotlight in Fortune magazine instead, in exchange for Summerland designing, sponsoring and maintaining his Web site.
Becce also wanted FaxSav's powerful broadcast facsimile service, but he couldn't afford its price. So FaxSav discounted its rates in exchange for Becce's Sawtooth Public Relations savvy.
"We've been delighted with both situations," Becce says. Becce's introduction to the barter business was serendipitous, but his experience is shared by many companies today. The National Association of Trade Exchanges estimates 350,000 companies in the United States and Canada participate in barter or trade each year, and exchanged $4.3 billion of goods and services in 1996 alone.
The Internal Revenue Service declines to estimate how much unreported trade occurs. "I would suspect that there's a whole underground economy around this area that the IRS would love to know about that individuals have no desire for the IRS to know about," says Joyce Gioia, president of The Herman Group management consulting firm-who hastens to add that they report all trade transactions to the IRS on Form 1099(b).
Tom McDowell, NATE's executive director, says there's no reason to fear IRS scrutiny if businesses report the cash value of trade transactions as taxable income. In 1982, Congress passed the Tax Equity and Fiscal Responsibility Act, empowering trade exchanges as third-party record-keepers for their business members. "What we've really done is taken barter, which was considered part of the underground economy, and made it a taxable event," McDowell says.
Trade exchanges organized at the local level let companies match their barter needs with one another. Additionally, NATE has organized a "barter association national currency," which lets 55,000 participating businesses in 75 local exchanges find products and services for barter anywhere in North America. "The BANC is nothing but a trade exchange for trade exchanges," McDowell explains. Trade exchanges pay a small fee to participate in the BANC; member businesses pay nothing.
Companies do pay a one-time fee to join an exchange (ranging from $300 to $600), and buyers pay a 10 to 15 percent transaction fee-in cash based on the value of the product or service. Exchanges keep records for the IRS and member businesses to file tax returns, while establishing the local, regional and national markets available to their diverse memberships. "Just about every kind of business will have excess capacity, inventory or time that they can use in barter," says Jack E. Schacht, whose National Trade Association near Chicago facilitates $45 million in barter each year.
Whether you join an exchange or trade informally on your own, experienced hands offer a few tips (besides keeping meticulously accurate tax records) for barter success:
"Make sure you're comfortable with the people you're doing business with," says Sawtooth's Becce. "I would not have done [business with FaxSav and Summerland] if I wasn't sure that the people I was doing business with were going to come through on their end." Put any stipulations or guarantees in writing, he adds.
Consider joining an exchange, McDowell suggests. There, rules and markets are already established: "See if there are people [in the exchange] who will buy what you sell, and people who have what you need."
Barter only for what you need. Becce emphasizes: "Make sure it's something that's really functional." Gioia adds: "What you want to find is what has a high perceived value to the potential customer, and a low cost to you."
McDowell notes: "[Barter] can be a very effective business tool up to about 5 percent of revenues. After that, you need to be bringing in cash, because we can't do your payroll and inventory. For that, you need to be bringing in business."
Treat barter money like cash. Some companies, especially smaller ones, spend barter money more freely than cash, according to Allan Chernoff, corporate barter director at Central Florida Investments Inc., which does $3 million a year in trade.
"A barter dollar should replace a cash dollar that's already been budgeted," Chernoff insists, so the cash can be spent where barter won't be accepted.
"Someone in the company should be given the responsibility for making the barter work," Chernoff adds. Typically, the distracted entrepreneur takes charge of all barter deals, or no one does it. "If there's no one the owner can hold responsible," Chernoff warns, "then nothing happens."