Benefits of barter trade system
Bartering can also help economies achieve equilibrium , which occurs when demand equals supply. When two people each have items the other wants, both parties can determine the values of the items and provide the amount that results in an optimal allocation of resources.
A person can also exchange an item for something that the individual does not need because there is a ready market to dispose of that item. Companies may want to barter their products for other products because they do not have the credit or cash to buy those goods. It is an efficient way to trade because the risks of foreign exchange are eliminated.
The most common contemporary example of business-to-business B2B barter transactions is an exchange of advertising time or space; it is typical for smaller firms to trade the rights to advertise on each others' business spaces. Bartering also occurs among companies and individuals. For example, an accounting firm can provide an accounting report for an electrician in exchange for having its offices rewired by the electrician.
Countries also engage in bartering when they are deeply in debt and are unable to obtain financing. Goods are exported in exchange for goods that the country needs. In this way, countries manage trade deficits and reduce the amount of debt they incur. While it is mostly associated with commerce during ancient times, bartering has been reinvented in this era through the internet.
The benefits of barter
Online barter exchanges became especially popular with small businesses after the financial crisis, which culminated in the Great Recession. According to The New York Times , barter exchanges reported double-digit increases in membership in As prospects and sales dwindled, small businesses increasingly turned to barter exchanges to generate revenue. These exchanges enabled members to find new customers for their products and get access to goods and services using unused inventory.
The exchanges also used custom currency, which could be hoarded and used to purchase services such as hotel stays during vacations. The Internal Revenue Service IRS considers bartering a form of revenue and something that must be reported as taxable income. Under the U. This is done by referring to past cash transactions of similar goods or services and using that historical revenue as a reportable value. When it is not possible to accurately calculate the value, most bartered goods are reported based on their carrying value. For the IRS, estimated barter dollars are identical to real dollars for tax purposes, which means that barter arrangements are considered the same as cash payments.
The barter dollars are reported as income and taxed in the fiscal year in which the barter occurred. The IRS further distinguishes between different forms of bartering, and there are slightly different rules for each type. Since bartering has tax implications, it's worth consulting a tax professional before making any significant commitments.
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So how can an individual successfully barter? Here are some tips:. Identify your resources: What items do you have that you could easily part with? Use a critical eye to go through your home, and consider possessions you may have in storage or that another family member or friend is currently using.
If you would prefer to offer services, honestly assess what you could provide for others that they would otherwise pay a professional to do. It could be a skill or a talent, or even a hobby, such as photography. Put a price tag on it: Successful bartering must result in the satisfaction of both parties. This can only happen if the items bartered are realistically valued. If you have an item you would like to trade, obtain an accurate appraisal. An item is only worth what someone is willing to pay for it. Therefore, do your research and look at the "selling" section on eBay to find out what online buyers have paid for similar items.
Lesson 3: Barter versus money
To value a service, call around for local estimates from professionals to find out how competitively you can price your abilities. Remember to be honest about your skills and to factor in costs associated with the exchange; for example, shipping for goods or materials for trading a skill. Identify your needs: Be specific about what you are looking for in a barter exchange.
In addition to specific items you may need, here is a list of potential services that you could barter for:. If you don't have a specific person or business in mind, try word of mouth. In addition to directories, newsletters, and the like, many networks sponsor membership gatherings in which representatives from various businesses can meet and talk.
These "mixers" enable small business owners to establish valuable contacts and, in many cases, make transactions that benefit both themselves and other network members. A network member who provides substandard service to a fellow member will find that negative publicity can travel quickly in mixer settings. In addition to serving as a facilitator of bartering transactions, barter networks usually provide a range of ancillary services to their members.
In addition to providing recordkeeping on all transactions that go through the organization, most networks will provide regular statements monthly, quarterly, annual to members and provide them with necessary tax forms and information.
Bartering has been hailed as a potentially valuable new addition to the strategic arsenal of small business owners for several reasons. Major advantages of barter exchanges include the following:. Employee compensation—Small business enterprises are often strapped for cash when it comes to providing bonuses or perks to their employees, but barter exchanges are a potential avenue for companies that want to reward their workforce in some way.
For example, some companies have established system within barter network so that employees can choose rewards from the offerings of other exchange members within certain financial limits, of course.
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Under these arrangements, business owners set up "subaccounts" for individual employees to which barter credits owned by the business can be transferred. Employees thus have the opportunity to spend those credits anywhere in the exchange as they see fit. Make use of excess inventory and used equipment—Barter exchanges are often ideally suited for companies who want to unload excess inventory or old equipment machinery, office furniture, etc. They can unload their extraneous goods and equipment in exchange for credits that can be used to procure valuable goods and services from other network members.
Business Travel—Increasing numbers of small business owners are using bartering as a way to cut down on costs associated with business travel, especially as the number of lodging facilities engaged in bartering practices continues to grow. Debt Collection—Groenwald noted that small businesses often depend on prompt debt collection to maintain their very viability, "yet using an attorney or commercial service for collections takes both time and money, and writing off the debt is a no-win situation.
Some of this value is sacrificed to network transaction fees, but small businesses willing to use this option still receive a healthy percentage of the amount owed them. Many barter relationships eventually blossom into full-fledged cash business arrangements, as the companies in question develop trust and respect for one another. Line of Credit—Bartering networks can also serve as an alternative to more traditional means of financing for small businesses. Cash Savings—Barter exchanges enable small business owners to keep greater amounts of cash on reserve, an especially important consideration for new businesses.
Analysts do admit, however, that there are drawbacks associated with bartering as well. Some businesses that participate in bartering may find that the range of products or services available do not fully address their needs, or they may not be available when they are needed. Small businesses interested in exploring membership in a local, national, or international barter exchange should consider the following factors when examining networks:. Money is accepted as medium of exchange.
People exchange goods and services through medium of money when they buy goods or sell goods. Money serves as a unit of value or unit of account and acts as a yardstick to measures exchange value of all commodities. The value of each good or service is expressed as price i. Thus money makes keeping of business account possible. Coins of less than 50 paise are no longer in use now. Again, it helps to make contracts which involve future payments.