Barter Can Sometimes Be Better Than Cash

Historians feel it began as long ago as when our ancestors were still living in caves. We know for sure that it existed in Greece before they developed a monetary system around 500 BC. A farmer with too many sheep traded one for some clay pots in which to make cheese. The clay artisan sheared the sheep and made a blanket from the wool which he then traded for some metal he could use to decorate more pots.

And that was the beginning of barter. One party has something. Another party has something to trade for it.

Now, though, the two parties don’t have to do a deal between themselves. Each can “trade” a product or service to an unrelated third party and get credit they can use for something they really need.

The secret is an organization that acts much like a bank. It keeps track of its members’ deposits and withdrawals -“ in a currency commonly called trade dollars -“ and facilitates the bookkeeping.

What makes barter attractive, especially in a sluggish economy?

Don Mardak

“Most businesses have excess capacity,” explains Don Mardak, chairman, president and CEO of International Monetary Systems, Ltd. (IMS). IMS is one of the largest trading networks in the country and operates in 50 markets nationally. “If it’s a professional person, they have empty time slots. If it’s a hotel or airline they have empty rooms or seats. A restaurant will have empty tables they wish were filled.”

It’s the time-critical situations that offer the best use of trade dollars. “As time passes,” says Mardak, “the excess capacity evaporates into thin air. You could look at hotel rooms or restaurant tables as perishable commodities. If someone were to use trade dollars to take advantage of those otherwise worthless empty rooms or tables then that’s a win-win.”

Mardak offers a more specific example: “If you owned a restaurant and wanted to mount a $20,000 ad campaign would you want to write a check to the advertising agency or issue some gift certificates to your restaurant? When you write a check the money’s gone from your bank account. When you issue gift certificates you’re printing money.”

The problem comes when the advertising agency doesn’t need $20,000 worth of gift certificates. Then what? Mardak says that’s why barter organizations were created. “It’s too difficult to do direct trades at all times. If I have apples and you have oranges -“ and I’m allergic to oranges -“ we can’t do a deal. Maybe the restaurant can find 50 or 100 ‘buyers’ for their gift certificates. They then get trade dollars in exchange for them -“ and use some of those trade dollars to pay for their advertising and perhaps have enough left over to buy my apples-¦ and your oranges.”

Mardak’s IMS has nearly 15,000 members across the nation. “These are companies or professionals who have excess capacity of some sort,” he says. “They are firmly committed to the barter system.”

IMS has nearly 15,000 members across the nation.

As an example of that commitment, Mardak continues, “Even for something as small as a car wash -“ if a member knows a particular car wash will take her trade dollars she’ll drive across town, passing four or five other car washes along the way, to get to the one that takes the trade dollars rather than cash. All those others lost the business, the one who takes the trade gets the business. Once you’re in the network you’ll always go to the trade clients first.”

Mardak is asked about the rate of exchange. Do some members benefit more than others? “In a way, professional and service organizations -“ or those companies we mentioned earlier who have perishable merchandise such as hotel rooms or restaurant tables -“ do because they’re dealing only with their time or excess capacity. In a typical barter network,” says Mardak, “some 70 to 80 percent of members are what we call ‘soft-goods’ providers.

“Hard goods providers, such as manufacturing organizations or retailers have to spend money up front to either make or buy a product before they can ‘sell’ it to a member for trade dollars. They gain equality, however, because their normal mark-up results in their getting full retail value in trade dollars.”

IMS broker with a client.

Often, according to Mardak, hard goods providers have excess inventory or discontinued items that they’re happy to sell for trade dollars. “That stuff is sitting on shelves and not moving so when they deal in the network they get a benefit for last year’s model.”

Plus, Mardak adds, “they don’t have to do deep discounting as they would have to do if they were selling for cash. Last year’s model lawn mower is still worth its retail price in trade dollars. Our members buy at list price, and sell that way. But, because of what we call barter leverage, everybody is out only the amount of cash they had to pay wholesale for their item from their supplier.”

Examples abound in the world of barter. “You sell a suit to someone for $500, yet you bought it wholesale for $250,” explains Mardak. “You then take your $500 in trade dollars and buy a new chair for that amount -“ which probably cost its seller only $250 to buy from his wholesale supplier. See how easy that is? You go to a restaurant and use your trade dollars to pay what everyone else does -“ the price on the menu. The difference between you and everybody else is that you’re paying with trade dollars that may have cost you 50-cents or even less. A $34.50 steak may end up costing you $17.25. That’s why a lot of our members eat out every week.”

An IMS Expo.

There is one area of caution, however. Mardak suggests that if you’re having a contractor bid on a project -“ a new asphalt parking lot, for instance -“ “you should get three bids using trade dollars, and probably an additional one for cash, just to make sure you’re getting the best price.”

A good barter organization polices its members and the deals they make to insure quality service and to prevent the practice of, “I normally charge $100 for this but since you’re buying with trade dollars the price is $300.” Explains Mardak, “We can warn the offender, or cut them out of the system entirely.”

Members of barter organizations provide everything, from accounting to zoo visits. Fred Detwiler, founder of TradeFirst, which has offices in Michigan, Ohio and Florida, says that one of his most unusual members is Erebus, a haunted house in Pontiac, Mich. He says a little more quietly that some members are in the “adult entertainment industry.”

While IMS belongs to a national organization such as the Reciprocal Trade Association, Detwiler’s TradeFirst is “the largest independent bartering firm in the country.” He is asked if there are any regional differences in either his membership, or the products or services they offer. “Our member companies are very similar in nature regardless of region, except for the fact that Florida happens to be a vacation destination for many people, and there are a lot of companies that cater to leisure activity businesses like sport fishing, golf and tourist attractions.”

Fred Detwiler, founder of TradeFirst.

How is barter doing in today’s economy? Detwiler says TradeFirst is doing well. “We have grown consistently over the past two years. In spite of the recessionary economy, we have experienced an overall 8-10 percent growth rate in 2010 from the previous year. Even though some companies may not have survived, most have found that by trading, they have been able to save cash and use excess inventory/capacity to their advantage.” Then Detwiler says something surprising: “Being in the Detroit region, we are used to the cyclical nature of the automotive industry, the ups and downs. Many other parts of the country are not used to this, and for this reason, are having a tougher time during the downturn.”

Mardak reminds us that “when the economy is in the tank nothing is really changed. There’s just as much coal and oil in the ground, apples on apple trees -“ but the money system has gotten messed up and we can’t move anything around. By having a secondary economy, the barter system, you can still do business. People still have their abilities. Dentists can still care for teeth. Printers can still print, but they have fewer customers coming in the door. If you can give them another way to get someone to come to them, to do business with them with trade dollars, then business can still happen.”

Is there anything special about the actual transaction process, Mardak is asked. “Most transactions are handled much like a Visa or other credit card transaction. The seller calls our automated system, enters his account number, the amount of the transaction and the buyer’s account number. If the buyer has enough funds in his trade account the transaction is approved. Even if he doesn’t have enough in his account, for most of our clients we provide a line of credit in trade dollars. It’s sort of like overdraft protection.”

Another benefit of the barter system, Mardak explains, is that banks still aren’t providing lines of credit “and we are. It’s not just based on their credit rating, it’s on their sales history with us and their ability to pay it back. A good client can get as much as six months worth of business as a credit line. We have $57 million in credit extended to our clients.”

Barter exchanges are keeping up with the times, and the needs of their clients. TradeFirst’s Detwiler says “We have electronic banking systems, and even electronic apps for iPhones. Some member companies also allow trade dollars to be used with online purchases, if their systems have been set up to handle this.”

Mardak concludes, “We’re helping businesses be more successful, get more customers and be more profitable.”

What more could you ask.