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Wed 30 Jul 2014 02:22 PM

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Bartering as a finance option

Cash might be king, but there are other ways for start-ups to trade that don’t require you to have funds on tap. We look at bartering as a different possibility

Bartering as a finance option

Trading what you have for something you need can be a great way for small businesses to complete tasks without having to deal with high costs.

Otherwise known as bartering, it’s an age-old system of exchange which has long proved popular among those who don’t have capital to deploy but do have skills.

Furthermore, non-cash trade, where goods or services are directly exchanged for other goods or services without using a medium such as money, accounts for nearly 30 percent of the world’s total business while 20 to 25 percent of world trade is done in some form of counter-trade.

According to the International Reciprocal Trade Association, a US organisation created to promote equitable standards in modern bartering, $12bn worth of goods and services are traded every year without any currency changing hands.

We take a closer look at this very old but often overlooked concept to explain its benefits for start-ups, which include gaining a competitive edge by driving new customers, reducing capacity and increasing cash flow.

First of all, it allows you, as a business owner, to buy what you need with your own surplus products, and preserve working capital for other expenses. Therefore, the main concern of all start-up owners – cash savings – is also the primary benefit of bartering.

Secondly, bartering allows you to improve flow of units into and out of your inventory by exchanging excess products for needed goods and services.

If you have some unwanted or non-strategic assets, bartering could be an effective way to transform this otherwise lost profit into new income.

Thirdly, a barter deal can also expand your reach, credibility or brand recognition in the market even before the official launch of a new product.

Here are a few examples of how it works:

  • You are a web designer who needs a bookkeeper. At the same time, the bookkeeper has a poorly designed website, so there’s a great bartering opportunity.
  • You agree to be the property manager for the owner of offices who offers you low-cost or even free office space.
  • As an event manager, you commit to organise three corporate parties for a legal company which has offered you free legal advice in return.

Let’s check what additional benefits bartering can bring you:

If you own a restaurant, for instance, and you need some full colour promotional flyers printed, you can take a usual route and get them printed for about $1,000, or you can offer the same value in meal vouchers to the owner of a printing company. 

By bartering this way, you make a saving. Your flyers only cost you whatever $1,000 in meals really cost you, which is usually 50 to 70 percent of the retail price.

In addition to securing dinner reservations at your restaurant for the three evenings that month, now you also have $300 to $500 in cash which you wouldn’t have had if you had simply purchased the flyers for cash.

The advantage is obvious, isn’t it?

Nowadays, entrepreneurs have options that make bartering more effective and with less risk, including organised barter exchanges and corporate trade companies.

Before you join any of the bartering networks and start the exchange of products and services with other start-up owners, make sure to follow our tips for becoming a savvy and successful barterer:

Keep it legal

Just because money is not being exchanged in the bartering process, it doesn’t mean that you’re not exempt from any regulations. Make sure to consult with your lawyer what legal implications this process requires in the country where you’re operating.

Know your real costs

Make sure to understand what your product or service costs to deliver before using it as currency.

Be flexible

You should keep an open mind about what is worth trading for – savvy bartering takes creativity.

Don’t let your guard down

Just because money is not being used doesn’t mean you shouldn’t check your potential partners or counterparts. Therefore, ensure the other party is legit.

Make a contract

Stipulate precisely what each side will give and receive, and under what time frame the transaction will occur in order to ensure that both sides will get something of equal value in return.

Keep an honest dialogue

It might happen that in the process of delivering a service to you, you will realise that one of your employees might have more cost-effective approach to some critical aspect and might be able to do that with a higher quality.

Barters are delicate, and expressing and resolving the issue in an open dialogue is possible if the both sides share core values.

Keep good records

Although the exchange network is obligated to report your transactions to the relevant authorities, both sides are advised to always keep their own records just in case.

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