10 Myths About Barter
By Tram Holloway
For those that don’t know the term ‘barter’, it is the oldest and simplest form of commerce known to Man. Bartering is the exchange of goods and/or services between parties without the need for cash. Example: “I’ll trade you flooring for roofing.” Even though it has existed for thousands of years (most likely since the dawn of Man) and globally governments, large corporations and individuals engage in over $1 trillion of barter business per year, there still exist some urban legends and myths about this practice.
Due to the economic crisis facing the world, more and more people are bartering, especially via credible, organized barter organizations like AllCity Barter, that make trading between multiple parties child’s play. It is the intention of this short article to dispel some of the myths and legends still hanging around out there.
- IT’S ILLEGAL:
MYTH! Far from being illegal, barter is encouraged due to the economic benefits it creates. Any entity that has surplus stock, time, or capacity is smart to exchange what it has too much of for things it would have paid cash for (or might not have the financing for) especially in this economy. The IRS website has a section just for bartering: http://www.irs.gov/taxtopics/tc420.html. All barter income must be declared just like cash revenues.
What is illegal – just like cash under the table – is not declaring trades. This is a major reason to belong to an ethical barter company like AllCity Barter that takes care of all paperwork and issues 1099b statements each year to members.
- IT’S MORE EXPENSIVE TO BARTER:
MYTH! The opposite is actually true. Barter saves money – which is the major reason governments and big business use it so much – because you are moving things you don’t need and have usually already purchased (and are probably depreciating assets). Every company has a cost of goods and operating expenses. Because barter brings brand new business from alternative sources, all barter income is produced at cost.
Example: If you buy coffee cups at 20 cents on the dollar and sell them for $1.00, you have an 80% gross profit margin (out of which you cover your expenses: advertising, phones, salaries, etc.) If you have 100 cups in your inventory you can’t sell and another company is prepared to trade $100 of office supplies for your cups, economically speaking you just bought $100 of office supplies for only $20 cash outlay. Who wouldn’t want to do that?
One thing to watch out for is how well an organized barter company controls trading. Some older barter companies have been known to allow their clients to inflate their barter prices, or even take part payment in cash (which is not true barter!) and something that is not easy to control when they disclose their membership list.
- THE QUALITY ISN’T THE SAME:
MYTH! Although when you engage in direct trading with another party there is a large element of trust, since in most cases one party must go first – “You fix my truck, then I’ll do your electrical work” – but almost all direct trade occurs between people that know each other. Barter companies can often ensure better quality and more assurances, because there is no (or limited) direct trading. The majority of members state that the quality of service they receive is actually higher, because their member benefits are so good, they don’t want to risk expulsion from the exchange for not providing quality work.
- IT’S OLD FASHIONED:
MYTH! It’s the oldest form of commerce, that’s true, but it is far from old fashioned. Especially since 2000, when MBE reinvented the way organized barter is transacted to ensure all trading is conducted 100% on trade 100% of the time, and at exactly the same pricing as cash (which had never been done before at a national level.) As a comparison, farming is probably as old as bartering, but with developments in technology nobody would call farming old fashioned.
- YOU CAN ONLY BARTER FOR SMALL STUFF:
MYTH! Although it is true when you trade directly with another business that smaller transactions are easier to manage, the advent of organized bartering has allowed almost any trade to take place. The majority of direct trades are limited to the “pizzas for a haircut” level, but with efficient and well managed systems like MBE-barter, amazing trades like $100,000+ printing jobs are possible all at 100% trade and the same as cash pricing.
Theoretically, there is nothing that cannot be traded via AllCity Barter system, since it is probably the only bartering mechanism that conducts all exchanges at the same pricing as cash.
- BARTER COMPANIES THAT DON’T DISCLOSE THEIR CLIENT LIST ARE BAD:
LEGEND! Although at first this may make sense, when investigated deeper it is actually better to belong to a large barter company that DOES NOT disclose your private information. Since it makes much more economic sense to trade rather than spend cash, all exchanges with open lists cannot control members joining just to convert existing cash relationships to barter. It makes sense for the new member, but steals cash revenue from the older, existing members, and is usually a cheap sales trick. What is more important than a directory of members is the availability of goods and services, and the attrition rate of members. Exchanges that cannot fulfill orders usually have a very high turnover and ultimately will fail – especially in a bad economy where cash is tight.
- BARTER ONLY WORKS FOR SERVICES:
MYTH! It is true that service companies have a lower cost of goods than a business that sells product, however, provided there are controls and assurances that the correct (same as cash) prices are being charged, both goods and services can be exchanged. The cost structure of a business does not change just because something is bartered; only the economic advantages change for the better.
- ISN’T BARTER AND HAGGLING THE SAME THING?:
WRONG! Some people confuse the two terms. Haggling is negotiating a lower price for something; barter is simply exchanging one thing for another. There is a big difference, although certain TV shows like “Let’s Make a Deal” have confused the terms somewhat.
- I ONLY BARTER FOR CASH:
Since barter predates money/currency, cash is actually a form of barter note (hence the term ‘bank note’.) People “exchange” their dollar bills for goods and services they need – which bridges the “my stuff for your stuff” limitation of traditional bartering. Obviously every business needs cash revenues coming in to cover various bills and expenses that they cannot barter for, but overlooking using barter as an essential part of their business model can be fatal to their success. A business interested in conserving cash is stupid not to engage in barter, if it has the opportunity because of the huge cash savings.
A smart business – especially with the help of a good barter company – can potentially offset over 20% of their cash outlay. Theoretically, using the AllCity Barter system, any business can offset much more than just 20% because the pricing is kept the same as cash, which many other barter companies cannot control.
- THERE IS ALWAYS A WINNER AND A LOSER:
MYTH! Similar to point (3) above, in traditional one-on-one bartering in many cases one party goes first and it is often difficult to find an exact dollar-for-dollar match. This is a major reason for the increasing growth and success of barter companies like AllCity Barter as they allow businesses with no commonality to gain the economic benefits of barter without directly trading with each other.