When money is no object - advantages of bartering - includes related article on tips for bartering

Nation's Business, July, 1991 by Jordan E. Cohn, Steve Kaufman

When John Tanian tallied them up, his cash outlays for his accountant, lawyer, broadcast advertising, printing, and bodywork on his fleet of 175 rental cars totaled only $7,500 last year.

Tanian, owner of American Discount Rent-A-Car, in Framingham, Mass., estimates the retail cost for these services at $75,000. He kept his spending to a tenth of that amount through a venerable commercial concept, a practice as old as business itself--barter.

Tanian accepted payment for car rentals in "trade dollars," which are credits used instead of hard cash to purchase a range of goods and services. In return, he used those trade dollars to pay for the $75,000 worth of services. His only cash outlay was the $7,500 he paid to Bartermax, Inc., of Sharon, Mass., as commission for coordinating the exchanges. Of course, credits from a barter exchange, like cash or credit sales, are taxable.

Today's version of the commercial barter business started in Los Angeles in 1960, and since 1980 its growth has surged so fast that estimates of total transactions vary widely.

Bob Meyer, editor of Barter News, a trade journal published in Mission Viejo, Calif., says that in 1990 more than 175,000 businesses completed barter transactions valued at almost a billion dollars, up from $200 million in 1980.

The International Reciprocal Trade Association, a trade group based in Great Falls, Va., has an even higher estimate. It says 220,000 American companies last year conducted $5.3 billion worth of barter, compared with 140,000 companies that exchanged $3.3 billion worth of goods and services in 1985. Most of the participants are small businesses, but they also include McDonnell Douglas Helicopter Co., which recently dispensed $10 million worth of nuts, bolts, washers, and screws through barter.

Exchange companies are the lifeblood of barter. The companies usually consist of several hundred members, who swap goods and services with one another. The barter exchange coordinates the transactions.

Exchanges establish a system of trade credits that work like a form of currency. Members' accounts are credited when they render goods or services, and their accounts are debited when they obtain goods and services. The exchanges keep the accounts and expedite the flow of trade.

Exchanges make their money by charging one-time cash membership fees--generally $300 to $500--and by collecting 10 percent of the value of each deal in cash from the buyer or the seller, or half from each. When a business makes a barter sale, it receives trade dollars, which it can use to purchase goods and services from any member of the exchange. Members pay with trade cards, comparable to Visa or MasterCard, and the exchange sends them monthly statements detailing their activities.

The reputations of barter exchanges were sullied in the mid-1970s when some unsophisticated exchange owners inflated their currencies in a bid to attract extra business. One exchange owner, for example, artificially created 1,000 trade credits and gave them to a member advertising firm in a bid to attract new members. As a result, the member found itself with more trade credits than it could possibly spend. This type of behavior eventually killed the exchange.

The situation began to change in 1979 with the establishment of the International Reciprocal Trade Association (IRTA). Formed to foster the interests of the barter industry, IRTA works to institute professional standards concerning exchange operations. The association offers advice on establishing exchanges, and it provides software programs that teach exchange owners how to manage and market their businesses. "People in the industry no longer work in a vacuum," says Meyer of Barter News.

The industry also got a shot in the arm from the huge success of bartering during the 1984 Summer Olympics in Los Angeles. The Olympics relied on barter to swap licensing rights for $116 million worth of goods and services from 30 major corporations.

Today, there are more than 400 barter exchanges in the United States, and in the current recession, many of them have seen an unusually sharp increase in business.

At the Bay Area Barter Exchange Inc., in San Francisco, business in the first quarter of this year was up more than 20 percent over the same period last year. "We used to get almost all of our business from referrals," says Steven Goldbloom, the exchange's founder and president. "Now a day doesn't go by without people calling us and asking us what we do."

Exchanges find it easy these days to sign up new clients. "When cash is tight, companies are more open to alternative ways of doing business," says Susan Gruenwald, president of Chicago Barter Corp. "And barter is an option that both preserves cash and increases sales."

Today, many barter-exchange members say their only regret is that they can't barter even more. Michael Matthews, a San Francisco area optometrist, last year spent $8,500 in trade dollars for purchases through barter exchanges while he supplied $12,000 in trade dollars for services. Despite the imbalance, he says, he would like to double the volume of his barter revenue. Matthews says customers who pay for eye exams or contact lenses with barter fit smoothly into the regular flow of business, and he considers them "found" business.