Barter becomes crucial to more businesses

No money changes hands as goods are traded for services

By K. OANH HA Knight Ridder News Service

Monday, September 22, 2003

San Jose, Calif. -- To get her dog day care business up and running, Dyana Klein needed to hire an accountant to do her bookkeeping and a programmer to build a software system.

But like most new entrepreneurs, she was short on cash. In May, she put an ad in the barter section of craigslist, one of the Bay Area's largest online community bulletin boards. Now, Klein is getting $25,000 worth of services in exchange for dog day care.

"I would not be able to afford them without the trade. God, no," said Klein, laughing with obvious delight. Her business, Run 'Em Ragged Doggie Daycare, opened in August. "When you're starting a new business, you have to try to save every dollar you can."

An increasing number of entrepreneurs such as Klein -- along with florists, hoteliers and plumbers -- are making barter a part of their business model. From barter exchanges to informal networks, the world's oldest form of trade is helping to buoy businesses around the nation as they weather a sleepy economy.

Barter, which has had a reputation as an underground economy in which goods and services are traded untaxed, is coming into its own. The barter world boasts at least 600 above-ground barter exchanges worldwide -- half of them in the United States. The International Reciprocal Trade Association in Rochester, N.Y., estimates the worldwide barter industry, in which formal exchanges broker deals between businesses, to be $8 billion in 2001. But other estimates put U.S. barter alone at $12 billion a year.

What's certain is that barter exchanges locally and in the United States report greater trade volume and higher membership numbers for the past two years as the economy hit the doldrums. At Itex, based in Sacramento, Calif., the nation's largest barter exchange, members are conducting 30% more trades with one another. Meanwhile, Master Trade of Los Gatos, Calif., has seen its membership rise 25%. The 11-year- old local exchange has 700 member businesses.

Small businesses, from mom-and-pop shops to firms with fewer than 10 employees, make up the vast majority of participants.

Looking for alternatives

"When the economy is rough going, people are naturally looking for alternative ways to conserve their cash," said Krista Vardabash, executive director of the International Reciprocal Trade Association. "We definitely see an increase of trade in things that have a shelf life, like restaurants, travel and hotels. If they're not being used, they're gone for good and the owners make nothing."

Take San Jose's Park Plaza Hotel, for example. General manager Chris Billawala said the hotel is doing 35% more business in trade compared with two years ago because of more empty rooms. Within the last year, he's purchased about $20,000 in goods and services, including print advertising and printing, without plunking down cash.

In its simplest form, barter is a trade of goods or services between two companies. By joining a barter exchange, participants don't need to do a direct business-to-business transaction. Members can request to "purchase" services from anyone in the exchange.

The value of the transaction is based on the retail value of the product or service. When the trade occurs, the "purchaser," or recipient, incurs a negative trade balance that is paid off by providing its product or service to other members. Meanwhile, the "seller" accrues credit for the transaction and can spend it at other businesses in the exchange.

The barter exchange makes money by charging annual and monthly fees. For each trade, it's also paid 6% to 10% of the retail value in cash.

A typical exchange might include small businesses from automotive shops to printers to optometrists and companies with excess office products.

Since the downturn, membership among bigger corporations -- who trade millions of dollars at a time -- is on the rise, said Itex chief operating officer Alan Zimmelman.

"Reputable, recognizable businesses like Marriott, Hyatt and Sizzler are getting into the barter act," Zimmelman said.

Gaining legitimacy

The presence of big-name companies has helped "the barter world become more legitimized," he said.

Zimmelman, who has worked nearly two decades in the industry, is quick to acknowledge that barter has had a reputation of "fly-by- night operations" and others who saw the cashless trade as a way to dodge paying taxes.

In 1982, the IRS began to recognize exchanges as legal third- party record keepers, much like banks and brokerages. The exchanges are required to report to the IRS transactions totaling more than $600. The rule also allowed bartered goods and services that are bona fide business expenses to be tax deductible.

The barter landscape that's uncaptured by the industry and the government is informal barter networks, which thrive on the Internet through Web sites and person-to--person networking. Since craigs- list started the barter category in the Bay Area in mid-2000, the number of monthly postings has increased eightfold to more than 9,000.