The barter economy is massive. According to World Barter Organization, 20-25% of total trade happens as a barter exchange. It also reports that 65% of New York Stock Exchange-listed companies use barter as a trading method. Approximately 15 million individuals in China alone indulge in barter transactions. So many businesses are using this age-old system of trading goods and services.
Are you interested to know why large, small, and medium-sized businesses are using the barter system and why you should start using it too? Read the article to find your answers. We will get the fundamentals down to a T for those new to bartering. Understanding the fundamentals of the barter system industry will make it much easier for you to appreciate its significance and value.
What is a Barter System?
A barter system is a way of exchanging goods or services without using any money. It was used ages ago when currencies weren’t established. People used to give what they had to acquire something of equal value.
A barter transaction involves two parties who have something with them that the other party needs. Parties trade goods without any requirement for money, and the exchange is done. This is how barter works.
For example, I have a few logs of wood. You have some extra apples you would like to trade with me to acquire the wood. This is a double coincidence of wants.
However, a double coincidence of wants like this is not always possible. Moreover, how do you even determine the value of the exchanged goods? Are the bundle of wood logs and a basket of apples equal in value?
These holes in the system led to the introduction of currency as a medium of exchange. People started using money to acquire goods instead of exchanging goods.
But years later, people still use the barter system to save money and use available resources.
Two Ways in Which You Can Barter
There are two widely used ways of exchanging goods and services today without money.
Direct Barter
Direct barter is similar to the conventional barter system used before money came into existence. You directly get in touch with a business and exchange goods. Consider two businesses, a TV channel and an ad agency. The TV channel agrees to give ad space worth a certain amount of money. In return, the agency is ready to provide its advertising service for the channel’s new campaign. Their service also costs similar to the ad space they are getting for their clients.
Here, no money was involved, but the exchange still happened. Usually, businesses in similar niches or businesses that depend on each other keep exchanging their products and services to maintain their cash flow. There aren’t any intermediary bodies to decide the worth of the services or goods exchanged or to set up rules. Direct barter requires mutual understanding and good relationships with other businesses.
Using Trade Credits
Another method is by using trade credits. So if you want to trade some of your surplus product, you can give it to another business in the barter, but in return, you will receive trade credits. This way, there is no need for you to achieve a double coincidence of wants. This type of trade happens on trade exchange networks. These exchanges are what define the modern barter system.
Modern Barter System
Most modern barter transactions use the internet and barter dollars or trade credits to conduct exchanges.
Trade credits are used as common currencies to exchange a good or service. For example, you want to barter some furniture for your new cafe. You see a furniture store owner with a few pieces up for barter. You can get those pieces by giving them the equivalent trade credits from your account. So when you buy stuff, your account is debited, and when you sell stuff, your account is credited with trade dollars. Since no money is involved, you might think you’ll be exempted from tax. Sorry to burst your bubble, but you have tax implications on trade dollars as per the Internal Revenue Service.
Barter exchanges are third-party platforms where businesses can find other businesses interested in bartering. Online barter exchanges lift all the geographic restrictions on the participants, allowing them to explore more options.
The International Reciprocal Trade Association governs all modern trade and barter exchanges. But other than the legal body, all organized barter exchanges have their own rules and standards.
Barter exchanges provide a faster and simpler method for bartering.
The new exchange system has resolved the two major holes in the barter system business of ancient times. Here’s how-
- With trade credits, there is no need for you to achieve a double coincidence of wants.
We now have a regulatory body to set regulations and ensure that any form of exploitation is prevented thanks to barter exchanges. - An added advantage of the modern system is the reach. Businesses and individuals can reach more people and satisfy their needs better.
Why do Some Businesses Still Use this age-old Trading System?
Despite being an old system and a few holes, the barter system still prevails. It is preferred by many large, medium, and small businesses. Here are some of the most important reasons businesses indulge in corporate barter (barter between two businesses) and why you should, especially if you are a small or medium-sized business.
Save your cash.
The biggest benefit that businesses can enjoy is saving their working capital. Bartering doesn’t require the actual use of cash. You can create a barter network of companies that rely on one another’s goods or services, saving money while still managing to get the things your company needs. Alternatively, you could be a part of the bigger universe and meet businesses you have never heard of. Trade with trade dollars and put all your working money into your company’s expansion. For example, you have a boutique. You will certainly need cleaning services at your store. You can hire a cleaning service using trade dollars and save your fund to invest in advertising or securing raw materials.
Use Surplus Inventory.
Ups and downs are common in any business. Sometimes your products have so much demand that you have to apologize for not having enough stock. However, there are times when you are left with a tonne of surplus inventory. What to do with the remaining inventory is a constant concern. Should you initiate a sale? Should you put it up for a buy one, get one offer?
How about barter?
If your product can be helpful to other businesses, why not sell it to them? Instead of throwing it in the bin, why not earn a few trade dollars that you can use someday to buy a service you need?
Suppose you make cleaning products. You are left with a lot of inventory. Other than the regular consumers, businesses that provide cleaning services would be your customers (B2B). Sell your remaining inventory to a cleaning company and earn trade dollars. You can use these trade dollars to buy advertising space for your product.
Find customers and increase sales.
A barter exchange is not only a place to sell off your surplus inventory, but you can easily find businesses that can be your next big customer. Like the cleaning products company we discussed in the previous example.
If you can build a good relationship with the other business owners, they can also become your regular customers.
Add up to your overall profit.
Let’s say you were able to use trade credits to purchase a portion of the raw material. Your product’s production costs will decrease significantly, giving you a bigger profit margin. Increasing sales, using the surplus, and purchasing without cash contribute to a higher profit. Your firm can become more successful if you regularly barter.
Reduce overhead cost.
Overhead cost is all the extra expenses you must pay apart from the production cost — for example, salaries, office supplies, utility bills, etc. Whether producing products or not, you are bound to pay these overhead costs. You can reduce the money that goes into these overhead expenses by bartering some services or products like office supplies.
Trade benefits for your employees.
No matter in which industry you are, satisfying your employees is crucial. Employees are an important resource, and retaining them requires you to spend some money on their happiness apart from their usual salary. Companies now go beyond satisfaction to make employees happy with rewards, gifts, etc. There are ample businesses out there bartering their products that can be given as a reward and services your employees will love to receive. You can arrange a healthcare service for your employees using barter. You can buy surplus gift sets from a business using trade dollars and give them to your employees on special occasions or when they do something appreciable. This way, you can keep your employees happy while retaining your cash.
Increase your purchasing power
Your purchasing power is the total amount of liquid assets available with your company. This covers your liquid money, credit, and any external loans. Greater purchasing power has always been beneficial as long as it is used sensibly.
Bartering saves you a lot of money because no money is involved. Barter won’t help you increase your liquid asset. Instead, it will reduce the number of things you need to buy with company funds. You can buy all the raw products and services you need with better purchasing power. For example, you barter some office supplies and basic cleaning services. You could barter some gifts for your employees as well. The money that you would have used to arrange these things is now at your disposal to purchase the other necessities.
Bottom Line
Bartering is a way to free your cash flow and make your business more profitable. Businesses around the world have realized the potential of bartering goods. If you are a small business, you should try bartering to make the best of your available revenue and grow. Barter dollars will be the secret stash you can use in emergencies and save your capital.