Barter Your Way to Wealth

"Trading and bartering open a new world and is the way to progress'  Marco Polo

"Hundreds of businesses have solved cash flow problems by returning to a basic system of exchange." Australian Business Review

"There's a buzz-word in business - the barter exchange.  Bartering is big business - without money!  ANZ Bank's Money Matters

Barter means to exchange goods or services without using money.  It's a form of trading that has existed for centuries and has created huge fortunes for many forward-thinking individuals.   Many spectacular swaps are on record.  Manhattan Island was exchanged for a handful of trinkets, and organisations like the Hudson Bay Company and the East India Company in the USA, developed largely through barter.  Today, many firms all over the world use barter as standard business practice.

Barter existed long before money.  In simple societies, people still trade goods and services between themselves.  As societies develop and people's needs change, it's harder to find a perfect swap.  You might have cabbages to spare and you need onions, but you could spend all day - maybe longer - finding an onion grower who wants to swap his surplus for yours.  The same is true in commerce and industry, where most businesses have surplus capacity and goods they'd like to exchange but are unable to find the perfect swap themselves.

Barter's revival in recent years was prompted mainly by recession.  When times are hard, cash is a rare commodity, and barter makes sound economic sense, for business and private individuals, providing a useful way to hang onto cash while continuing to obtain essential goods and services.

Barter can be as simple or as complex as you want it to be.  At a basic level a teetotal man might offer to drive his drinking mates home from the pub, in return for them driving him to work during the week.  In more complex terms, a direct mail specialist might offer his mailing list to three colleagues, one of whom prints his circulars free of charge, the other swaps envelopes, the third typesets his circulars. 

But still parties to the transaction are few and share the same basic needs.  Exchanges like this can be organised quickly and easily by parties themselves.  With larger groups, whose needs vary, swapping becomes more difficult, and some means of coordinating between members is essential.

ORGANISED BARTER

Organised barter is the perfect solution to swapping between larger groups whose needs vary.  A central organiser - one person, a small group or a major national company - acts as a clearing house, arranging swaps between members in return for various financial incentives, usually joining fees and commissions on individual transactions.

Most systems have their own notional currency with an equivalent national or international unit.  Britain's largest groups work in 'Trade Credits', valued at £1 each.  American and most international barter groups choose US dollar equivalent.

Advances in computer technology over the past few decades have enabled barter to develop into a practical and very efficient method of trading, where multiple transactions can be coordinated between thousands of businesses.

Worldwide barter exceeds £300 billion annually with corporate barter at about £20 billion.  In The United States, barter accounts for around 10% of GNP and some 350,000 businesses participate in barter programmes, including household names Xerox, Pan Am, Continental Airlines, Chrysler and Hilton Hotels.  In Britain, about 75% of small businesses barter, as do 65% of companies listed on the stock exchange.  Here just a handful of specialist middlemen have appeared, including LETS,  The Bartering Company Ltd., European Trade Exchange and Anglo Bartering Co.

Special Note  'Barter' and 'bartering' are used interchangeably in the industry.  It doesn't really matter the meaning is the same.

The USA Experience

America boasts several barter millionaires, including J. R. Redshaw of Illinois.  Redshaw started a part-time barter business in the early 1920s.  His first deals were in household goods and personal possessions, and other usually low value items.  In just a few years he was trading Chinese junks for oil tankers, bank vaults for horses, until eventually he had several warehouses full of valuable commodities to barter or sell as he wished.

PSYCHOLOGY OF BARTER

An interesting piece of psychology applied to barter is 'Instant Gratification', where most people will trade something of higher value to obtain something they want at the time. 

An example is where a woman sees an antique ornament she really wants, but can not afford to buy.  She has some jewellery she doesn't want which is worth much more than the antique.  To her, the jewellery's value is low, compared to the ornament.  So, she trades her jewellery for the ornament and the trader increases the value of his stock without money changing hands. 

Barter expert, Morrison, calls this the 'I want it now' psychology, which allows traders to gain with each transaction.  He says "This psychology is quite prevalent in the barter business, and the professional can make quantum leaps in the value of his holdings by recognising it.  All it takes is a little time and effort, and sooner or later you will find yourself trading hotels for resorts, and factories for oil tankers."

BARTER IN BUSINESS, BARTER AS A BUSINESS

Barter is a useful way to obtain things you want yourself but can not otherwise afford.  It's also a very good foundation for a business, where you arrange swaps, accepting higher value items on each transaction, until you ultimately have a high-value item to sell or trade again.  Finally, you could start your own barter exchange, helping others trade between themselves.

Definitions of barter vary, and are sometimes loosely applied.  This need not concern us, as long as the swapping element is present.  Consider a few examples

-    Books and Magazines

Barter stores and others that exchange goods between customers are on the increase.  Book and magazine exchanges are particularly common.  In London, there's a small paperback book exchange operated from a corner of the owner's living room.  Popular titles line the walls and specialist books are stored in a huge converted cellar.

Clients pay a joining fee, currently £20, to avoid timewasters and to ease cashflow for the organiser.  Up to six books can be borrowed at any time at a cost of 10p each.  When books are returned, new titles are chosen in their place, and so the process continues. Clients can also swap their own books, value for value, for a standard fee on each transaction.  For higher value swaps, the difference is paid in cash.

-    Toys and Baby Hardwear

The same principles used for exchanging books apply equally to baby clothing, toys and children's hardwear like prams, pushchairs, cots and playpens. 

-    Clothing

Clothing, especially unusual items like fancy dress, ballgowns, wedding dresses and accessories, designer clothing and party wear are popular barter items and shops selling and swapping goods this way operate in most main locations.  In many cases, shops operate an exchange system alongside traditional selling activities.

-    Other

Other profitable and popular swapping areas include records, collectibles, autographs, and much more.

-    Swapmeets

Swapmeets, looking a bit like fleamarkets and collectors' fairs, are useful examples of commercial barter, where you'll find everything from train sets to books, stamps to wartime memorabilia.  Stalls at these events are usually manned by people who arrange swaps between collectors for a commission on each transaction. 

-    Gift Exchange

These proliferate in The United States but have yet to find their place in Britain.  For a set fee each time, clients can exchange unwanted gifts for items of similar value.  For higher value exchanges the difference is paid in cash. 

-    Trading Goods and Services (Work Exchange/Barter Exchange)

This is where skills are traded, value for value, and is the most common form of barter, especially in Britain.  Doctors, dentists, cake decorators, gardeners and drivers, all have skills to trade with others.

On a non-commercial level, if you are a childminder who hates housework, you can offer to mind your neighbour's children for the day in exchange for her spring-cleaning your home.  It's as simple as that. 

For another example, imagine you've just purchased a job lot of typewriter ribbons, sorted out those that suit your machines, and you're left with hundreds you can not use.  These can be swapped for things you do need, like stationery, advertising, photocopying, and so on.  As part of a local barter group like LETS (more later), the transaction can be handled by the organiser, through mentions in club directories, or by contacting fellow members direct.

On a more commercial footing, some organisers charge a fee for joining, in return for which newcomers receive credits to exchange for goods and services from other members.  The organiser earns from each transaction, usually 10% of the dollar equivalent.  So if a dentist has his car fixed and pays the equivalent of $500, his account is debited with that amount and he pays $50 hard cash to head office.  If he provides $1,000 of dental treatment to another member, the dentist's account is credited with the nominal amount and the patient is billed for $100. 

Running the exchange is just like running a bank, where the organiser credits and debits members'accounts, collects fees, and makes sure no-one gets too heavily into debt and risks going bankrupt. 

Although most exchanges charge buyers commission only, others invoice sellers too.  So it isn't unusual to find a series of commissions earned in three- or four- way deals, as for example where a plumber needs dental treatment, the dentist wants a gardener and the gardener's home requires new plumbing.

PROFIT AS A MIDDLEMAN

Commercial barter schemes aim to link clients for exchange purposes.  Currently, Britain's largest is European Trade Exchange based in Tyne and Wear.  They act as bankers and brokers between members and rarely operate one-to-one swaps.  E.T.E. is most useful to professionals and businesses who can advertise their excess capacity in the firm's quarterly magazine Barter Express.  Offers can be on a straightforward swap basis or barter/cash combination.

An Australian organisation called Tradebart provides much the same service.  Tradebart describes barter as "a main weapon in the fight against recession ... and the new one that's looming".  In Australia, barter is believed to be one of the fastest growing and most cost efficient ways to do business and firms like Tradebart have seen their membership grow by around 300% in the past twelve months.  Here is a typical scenario of how the barter exchange system works

1)  Business A. highlights goods and services it needs and would otherwise pay for.  * 

2)  Business A. lists its surplus capacity.  *

*   Examples of goods and services traded this way include

-    Excess stock.

-    Unsold advertising space.

-    Unsold airtime.  In the US, the New York firm of Atwood Richards Inc., barters exclusively in radio and TV time.  Unsold airtime is swapped for goods the stations themselves need or for selling at a discount to other members of Atwood's barter exchange.

-    Empty hotel rooms.

-    Empty airline, shipping, rail and other travel facilities.

-    Surplus restaurant places.

-    Excess labour and professional capacity.

-    Redundant stock as well as over-runs, end-of-lines, end-of-season fashions.

-    Etc.

3)  Business A. deposits its surplus goods or services into the pool and withdraws goods and services it needs.  For control purposes the barter company values goods and services in an accepted notional currency.  A. receives a cheque book and an account is opened in its name.

4)  The coordinator offers Business A's surplus capacity to other members and arranges for A. to receive the goods and services it needs. 

5)  A. pays for the goods it needs by cheque, using notional currency.

6)  The barter company debits the appropriate currency from A's account and credits sellers' accounts with a similar total.

7)  At the end of the month A. receives a statement of its account.

8)  The barter company issues A. with an invoice for a percentage of the amount of each transaction, payable in cash in a standard national or international currency.

ADVANTAGES OF COMMERCIAL BARTER

-    New customers, wider markets.  Increased purchasing power for one member extends the customer base for others.

-    Improved cashflow and liquidity.  Organised barter allows businesses to obtain goods and services using surplus capacity instead of cash. 

-    Excess capacity - goods, services and time - utilised. 

-    Increased investment and expansion opportunities.  Businesses can use savings to improve their businesses and increase competitiveness.

DISADVANTAGES OF COMMERCIAL BARTER

-    Less chance to shop around for product types, specifications and prices.

-    Low demand deposits can be left in the pool for long periods, making some members consistently in debit.

START YOUR OWN BARTER CLUB

A barter club can be operated for businesses or private individuals, or both.  Your role is one of banker, crediting and debiting other people's accounts.  You will be receiving deposits (goods, services) and passing them to other people, in much the same way that banks operate.  Members can be attracted through newspaper adverts or by direct mail, as for example where you decide to operate a barter club for precise groups like mail order dealers, publishers, artists, and so on.

Your ad. might say:

_______________________________

Mail Order Barter Club

Obtain specialist goods and services without paying for them!

Trade your own surplus stock and spare time for things you really need.

Call now and register  M. O. Barter 0171 999 777666

_____________________________

When enquiries come in, you explain how the system works.  Most likely you'll send a brochure to enquirers, explaining the set-up, joining arrangements, membership fees, how transactions take place, and so on. 

Your profits come from various sources from subscriptions, transaction fees (like bank charges), even paid advertising in a members' newsletter you might produce.

It's always a good idea to have a club directory, highlighting members' names and addresses, goods and/or services they offer and what they want in exchange.  In some cases, members can be left to trade direct.  Alternatively, you, as banker, can arrange transactions for them.

Most barter clubs have their own 'currency', usually with pound or dollar equivalents.  So, a 'mickel' might be equivalent to one pound, in which case, if a member offers to dig gardens for 4 mickels an hour and he trades with an artist who charges 12 mickels an hour, the gardener will have to devote three hours of his time in exchange for an hour of the artist's time if they trade direct.

In practice, the gardener might not actually trade with the artist and members can provide goods and services to others whose services they might never need. 

The most likely arrangement is for credits and debits (mickels) to be entered into a central account and for members to be issued regular statements indicating how many mickels they owe or are owed, according to amounts paid in and out of the account.

Applicants should complete an application form, make a deposit, and indicate what goods and services they need from the system and what they offer in exchange.  Various approaches are possible

-    Deposits and wants are listed centrally, on notice boards, members' directory or computer.  Members check things out for themselves and arrange one-to-one swaps direct.  Third-party swaps are handled by the organiser in exchange for a percentage fee on each transaction.

-    Exchanges are made via a central banking system, where members approach sellers direct and pay with barter exchange cheques.  Cheques are paid into the system and cleared through the organiser who maintains members' accounts and issues statements and charges interest at appropriate intervals. 

Find Out More

There's nothing difficult about barter and a number of useful publications will teach you the basics.  We particularly recommend Beat The Competition With Barter which covers identifying suppliers, selecting products, arranging and closing deals, promoting the business, operating overseas, accounting and VAT implications, and much more.

When Is It Swapping?  When Is It A Commercial Activity?  And When Does The Taxman Need To Know?

The taxman rarely needs to know about local transactions between private individuals.  But he is increasingly concerned with commercial transactions masquerading as barter, especially where a profit element exists.  So, for example, if you buy 10 computers at auction for £1000 which you swap for a car worth £5000, that £4000 profit might be contentious. 

WHAT TO DO NEXT

It's a good idea to join a few barter groups yourself to trade your own goods and services before deciding to organise your own group.  Write to various groups for details and make a note of their respective approaches.  Decide which suits you and your business and make a point of joining at least one depending on what goods and services their members need and what you will receive in exchange.  In time, you might like to ask members of your own social or business groups whether they would like to be part of an organised group.  Start with a group of friends or close colleagues before inviting strangers to join. 

Summary

Barter - and swapping - has huge potential, in business or as a separate venture, whether you go it alone or as part of a group, even if you decide to set up your own commercial barter scheme.