In the current economy, cash may be tight but businesses still need goods and services. That explains the current upsurge in commercial bartering: a process of trading what the business has for what the business needs. The global economy has been under much pressure. Businesses, retailers and even banks have been failing. Yet, a few businesses have the tools to prosper and even grow during these difficult times.
Before learning how modern commercial barter operates and how you can apply it to your business, you must first understand the basics.
What barter isn’t.
Many people think haggling “Asian market” style is barter. Nothing could be further from the truth! Going to a Bali market and haggling over the price is NOT barter… it’s just a form of negotiation!
These definitions have one limiting factor in that they indicate and lead the reader to believe that barter happens one‑on‑one, between two parties and requires each party to need or require the other’s goods or services.
While this is still possible, we shall regard this as “old style direct trade barter” as opposed to “modern barter”, the subject of this article.
Modern barter provides a more flexible way to barter using a plastic card and a unique currency called trade pounds.
Benefits of Barter:
There are many benefits available to businesses who exchange their goods and services with one another via a barter trading platform.
New customers and extra sales
Barter helps businesses gain new customers and make additional sales. Think about it. If you needed to make a purchase of some kind, would you rather pay cash or pay with your own goods or service valued at your normal selling price? Typically, business owners will go out of their way to make a purchase with barter pounds rather than with cash.
Let’s say you need to print a brochure. The quote from your local printer is £5,000 cash and the quote from a barter printer, who is a 20 minute drive away, is £5,500 barter. What would you do?
Well, let’s assume you run a small hotel. If you pay cash, it will cost you £5,000 immediately; however, if you barter it will cost you £5,500 worth of room nights in the future.
Providing you are not running at 100% occupancy and are not expecting to in the near future, then the “barter savvy” business owner will always accept the barter option and conserve his cash, knowing that by paying with what could easily be an “empty room” it is far better than consuming valuable cash.
From the printer’s position, he is happy; he has a new customer and his competitor, the local cash printer, loses the business.
Barter increases cash flow
Cash flow is the life‑blood of any business: the more cash flow you have the better.Businesses who understand barter are able to use barter to save cash in their business. Saving cash means increasing cash flow. The old saying, “A penny saved is a penny earned” can be extended to, “A penny not spent is a penny still in the bank.”
Every barter pound that is spent in place of a cash pound, is a cash pound saved. Having more cash allows the business to take advantage of more opportunities that might not otherwise be available to it. It’s all about having more bankable cash.
Barter creates additional profits
As a barter trader, you are able to make additional profits by virtue of the fact that you are effectively purchasing goods and services on barter at a discount equal to your gross profit margin less barter fees.
For example, a restaurant needing to spend £1,000 on advertising traditionally will pay with cash. This £1,000 expenditure comes off their “bottom line”.
If they were to make the same advertising purchase with barter pounds for T£1,000 and then pay for it with T£1,000 of meals, then it will only cost them the cost of the food on the plate plus the trade exchange commission. The cost of food is about 30% of the retail price plus 13% exchange commission, which totals 43% of the menu price.
In this example, the restaurant saves around £570 on their bottom line. Another way to look at it is: they purchased the advertising at a 57% discount.
Every business is different, but one thing is constant: their gross profit margin, less the barter commission, becomes their barter purchasing discount or barter leverage.
Barter creates wealth
Barter is an exceptional tool for the creation of wealth. Real estate has become a favourite barter transaction for those who are interested in creating wealth during tough economic times.
Today, many property developers are feeling the “pinch” of the recession – sales are low or non‑existent and their financiers are increasing the pressure to reduce debt. Genuine buyers for properties are hard to find, so when one comes along, they are “like golddust”.
The barter savvy real estate entrepreneur can use barter to leverage his position by reducing cash deposit requirements and purchasing at a substantial discount to the market price. Typical transactions can be between 25% and 40% barter.
So how does this help your business?
In times where cash flow is tight we find ourselves making decisions based on the money available in the bank rather than the business needs.
Management will say “Great idea but we can’t fund it”. This is an opportunity for some new thinking to be engaged. Could the new idea be implemented via a barter exchange and funded with down time or surplus inventory?
Another alternative is to utilise an interest free credit facility provided by a barter exchange. This means the business can access barter pounds immediately, complete the project and then pay the debt off with additional sales in the future.
Not only does the business access additional working capital but it pays the debt off with goods and services at its normal selling price, achieving a purchasing discount equal to its gross profit margin.
Barter is an amazing business tool and one that is misunderstood and under-utilised.
Other strategies include, collecting doubtful debts, filling down-time, selling surplus inventory, marketing without cash and gaining a competitive advantage.