Barter Exchanges Catch On As Credit Tightens

Tuesday, November 11, 2008

Small businesses find that trading for goods and services not only conserves cash; it can also substitute for borrowing and rack up savings

Shawn Cressman, president of Cressman's Lawn & Tree Care, the business his father started 33 years ago in Bethlehem, Pa., has occasionally engaged in bartering with other outfits over the years. But transactions were usually informal and not necessarily directly tied to the company's bottom line.

These days, though, Cressman sees bartering as a significant way to reduce cash outflow. Last fall he joined the Stroudsburg (Pa.) Merchants Barter Exchange, an association that coordinates and organizes trading of products and services among its more than 10,000 business members. In September, when the transmission blew on one of the firm's trucks, Cressman turned to the exchange and bartered for a replacement. "That would have cost between $1,500 and $2,000, and that was not in my budget," he says. He also bartered to acquire a $4,000 piece of stone-crushing equipment. "I probably wouldn't have bought one this year," he says. "It would have had too much of an impact on my cash flow." But as a result of strategic bartering, Cressman estimates he has been able to save about $6,000 total so far this year.

In recent years, bartering has gained currency as a relatively easy path for small outfits to attain goods and services without having to dig into their coffers. It has also become a successful channel to attract new customers and expand one's business. According to the most recent numbers compiled by the National Association of Trade Exchanges (NATE) in Mentor, Ohio, some 400 barter exchanges in the U.S. and Canada generate transactions worth $4 billion a year.

On the Upswing And now, with banks cutting back on credit lines or shutting them down altogether, the use of barter has gained renewed momentum. Notably, Thailand, the world's largest rice exporter, last month announced it planned to barter rice for oil from Iran, one of world's top 10 rice importers. For small businesses, ramping up their own use of barter is a strategy that allows them to reserve cash and still expand operations at a time when credit lines have yet to thaw.

Tom McDowell, executive director of NATE, says he has seen a 10% to 12% increase in new clients joining organized barter exchanges. "Suddenly, [business owners] were running into different obstacles, and they started looking for other avenues for resources, not just credit," he says. "The interesting thing that is happening in this economy is that businesses still have inventory and capacity. They still have expenses. What they don't have is customers." Barter exchanges (BusinessWeek SmallBiz, 4/16/08) are fee-based membership groups. Typically, barter dollars are issued when a member performs a service or offers a product that can then be used to purchase goods or services of another member within the exchange. (The exchange receives a commission on the "purchase" side of the transaction.) Most exchanges work on a 50-50 cash-to-barter system, while others, such as Merchants Barter Exchange, operate as a 100% barter trade system. Most offer lines of credit that can be used to snap up a host of items, from carpet cleaning services to office supplies to large equipment.

A Way to Get Credit Merchants' founder, Steve Bolles, says membership in his eight-year-old exchange, which has offices in 30 states, has tripled this year. As the financial situation remains bleak, Merchants continues to ramp up clients. "Just 18 months ago, when we would go and talk to business owners about signing up, they would say, 'We don't need to talk to you.' Now everybody gives us an appointment." A strong inducement: "Everyone we sign up gets a line of credit right away," Bolles says.

"Most people are looking to conserve cash," says Ralph Sigler, who owns Carolina Packaging & Supply in Raleigh, N.C., and belongs to two different exchanges. "We started bartering about 12 years ago. The way we were growing, it made sense to substitute barter dollars for cash dollars." Sigler says he bartered to obtain everything from security system installations to letterhead and envelopes. "I've saved anywhere from $20,000 to $25,000 a year by bartering, and I've also taken on a lot of new accounts." Bartering serves as another avenue to help keep businesses afloat. "I would say my bartering has gone up 20% in the past six months," says Mike Cody, owner of Chip & Crack Windshield Repair in Garner, N.C. "At first I used it for hotel stays and gifts to employees." Now he says he has begun to barter to obtain equipment for his business instead of having to spend cash. "If I were to make a guess, I'd say that I've saved over $1,000 this year." "Eventually we will see a shift in thinking," says NATE's McDowell. "What will happen is that people who were reluctant to use the credit line, or used it sparingly, will see the tremendous credit crunch and will look for new resources. They will find that they can use trade exchanges."

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