The Cash-Strapped Turn to Barter
By MICKEY MEECE
CAUGHT in the credit vise of 2008 that is threatening their livelihoods, small-business owners are turning in droves to an age-old source of commerce: the exchange of goods and services, or barter, to hold on to their precious cash.
New money is not flowing to Main Street. Since October 2007, there has been a decline of almost 30 percent in loans approved for small businesses, the Small Business Administration reported.
Companies short on cash are often forced to let workers go, and in October alone companies with 50 or fewer workers eliminated 25,000 jobs, according to the ADP Small Business Report.
“During recent history, we have seen these businesses adding jobs while larger-size businesses shed them,” said Joel Prakken, chairman of Macroeconomic Advisers, which prepares the report. This is the first decline in small-business employment reported by ADP since November 2002, he said, and the largest percentage decline since the economy was emerging from recession in early 2002.
In response, barter exchanges are working hard to sign up participants. The exchanges range from publicly traded entities like International Monetary Systems and the Itex Corporation to smaller operations like U-Exchange.com. Many are reporting double-digit increases in membership, as well as a bump in transactions.
At Itex, for example, registrations jumped 36 percent in October, said Steven White, the chairman and chief executive. The exchange, founded in 1982, has more than 24,000 member businesses.
Bartering has grown with the times and is now much more than “I’ll take yours, if you take mine.” Often, these days, multiple parties meet through online exchanges and amass credit that can be used for future transactions (more like “you take mine and I’ll take someone else’s later.”) Drawing on the reach of the Internet, many exchanges include participants from around the world.
What makes barter so appealing during an economic crisis? Barter specialists point to three attributes. First, a member business can find new customers and use excess capacity. Second, a satisfied barter partner often refers cash-paying customers to the small business. And third, the participants can conserve hard-to-come-by cash.
Ken and Angela Lineberger, owners of the Wine Tailor winery and retail store in Rancho Cucamonga, Calif., said sales would be flat this year had they not been active in the Itex exchange. Thanks to bartering, overall sales are up 8 percent, Mr. Lineberger said.
These are customers who wouldn’t normally seek out their wine, Mr. Lineberger said. “We just had a couple drive over 100 miles to buy six cases of our wine because they’re Itex members,” he said.
Itex customers pay the full retail price, he added; they are not discount buyers. The Linebergers use Itex dollars they accumulate in sales to pay for pest control, electrical work, accounting and legal services. “It’s nice to move those over to Itex,” he said, because it frees cash. They also use it for vacations and other personal transactions.
For tax purposes, barter is treated like ordinary sales, and its value must be reported. The barter exchanges record all transactions and report them to the Internal Revenue Service. Of course, informal bartering among small companies and independent contractors has gone on for decades, and some report the revenue and pay taxes, while others prefer to operate within the underground economy.
Bartering is estimated to generate more than $3 billion through exchanges in the United States, said Robert B. Meyer, who edits BarterNews.com, a trade publication. That does not include corporations that barter directly, he said. Official tallies are hard to come by, he said, because there are more than 250 exchanges and the systems are decentralized.
Hundreds of exchanges are available online, some national and some regional. Some charge membership fees and annual fees, while others do not. Often, there are transaction fees of up to 6 percent.
Small-business owners should do the normal due diligence when looking for an exchange, said David Wallach, president of the International Reciprocal Trade Association’s global board. For references, check with people or businesses in your area that use an exchange, and before entering into a transaction, vet your potential partner with the Better Business Bureau. The association, a nonprofit group that promotes barter and trade, has a test for businesses, “Is Barter for You?,” on its Web site (irta.com).
Chris Keogh, who runs his own construction firm, Jade Stone Construction, in Pearl River, N.Y., just completed his first barter transaction through International Monetary Systems (imsbarter.com).
“The construction business has always been feast or famine,” said Mr. Keogh, 47, a native of Dublin who has been in the New York region for 22 years. During a recent bad stretch, Mr. Keogh was scrambling to drum up new customers through advertising, Craigslist and even roadside signs. I.M.S. Barter saw the Craigslist post and contacted him. After he researched the company, Mr. Keogh said, he decided to give it a try, agreeing to paint a house for $5,000 — $1,000 in cash and $4,000 in I.M.S. trade dollars.
Mr. Dalsimer subsequently referred Mr. Keogh to two new customers. One of them will provide Mr. Keogh’s next project, painting a two-bedroom apartment in Somers, N.Y., in another part-cash, part-barter arrangement.
“You have to be careful how much you trade,” he said, because you don’t want your business to become dominated by bartering. And each side of a transaction carries that 6 percent fee, cutting into profit. Experts recommend that a business use barter for no more than 5 to 15 percent of sales to avoid crowding out cash business.
Many barter exchanges offer credit to members who have been turned away by lenders in the real economy; in its recent credit-line review in October, International Monetary Systems issued $2.7 million in trade credit to its network of 18,000 businesses, adding to an existing $55 million in established credit lines, said Krista Vardabash, its director of marketing.
“We base our credit on the products and services that the member businesses have to offer, not on their cash accounts or how they look on paper,” said Donald Mardak, the chief executive.
To be sure, bartering is not mainstream, said John C. Moore, a founder of U-Exchange.com. Still, traffic at the site, which is run by Mr. Moore and his co-founder, Barb Di Renzo, has spiked 70 percent this fall, he said, with an influx of participants from Spain, South Africa, Britain and the United States.
One new member at U-Exchange is R House Construction, owned by Rich Rowley of Tacoma, Wash. In a recent post on U-Exchange, he offered new home construction, remodeling, home repairs, real estate work orders, home maintenance and commercial improvements. In exchange, Mr. Rowley is looking for vacations, real estate, homes, land, dining, medical care, dental care, a boat, a motor home, groceries, gas, entertainment, a ski pass and tickets to Mariners baseball games or Seahawks football games.
So far he has had no takers, but he said he remained optimistic. “We have to learn to adapt to the changing landscape,” Mr. Rowley said. “Part of that is bartering. The exciting thing is this is another part of the puzzle that gets us to where we’re going.”
His wife, Kathy Robinson, came up with the idea of bartering as their business dropped off, said Mr. Rowley, who usually builds two houses a year and sells them. This year, he sold only one house; the other remains empty.
Even if the U-Exchange post does not work out, Mr. Rowley said, he has arranged privately to do renovation work on a vacation home in Ocean Shores, west of Seattle, while he and his wife stay in another beach home. “We really like to travel,” he said. “We don’t want to be denied that just because the economy is going south.”
"In most cases, there is no viable mass adding strategy for companies," says Joel Postman, principal of 
Apple's brand makeover resulted in broadening its potential market share, Adamson says. "Apple got back to its core DNA, which wasn't about a piece of technology or a piece of software. It was about ease and elegance of use. Ease of use became the lens through which they put everything."
Target has been enormously successful at differentiating itself from its competitors by revamping its brand into one of high-quality, fashion-forward products, while maintaining its low prices, according to Alina Wheeler, marketing consultant and author of Designing Brand Identity.
Patrick Adams, managing director at Secret Weapon Marketing, the Santa Monica, Calif., firm that created the advertising campaign credited with much of the makeover's success, says the comeback strategy was three-fold: fess up, fix the problem, come back with a new image.