Retail Barter
Small business owners conduct barter transactions through membership in commercial trade exchanges. Most members do business within a 35-mile radius. Their business revolves around services – everything from chiropractors, attorneys, graphic designers, and plastic surgeons to mom-and-pop businesses like dry cleaners and shoe repair.
There are 400 commercial barter exchanges in the U.S. and another 200 worldwide. The number of members per exchange ranges from about 200 to about 10,000, with most under 1,000. In total, the business-to-business network of barter exchanges represents over 450,000 companies.
Under the Tax Equity & Fiscal Responsibility Act of 1982 (TEFRA), trade exchanges are classified as third-party record-keepers with the same fiduciary responsibilities as bankers and securities brokers.
Corporate Trade
Larger companies trade goods and services through accounts receivable (AR) trading, relying on a corporate barter company to purchase inventory offered for sale with trade credits and subsequently to fulfill the credits by providing goods and services requested by the seller. The corporate barter company acts as a principal in the barter transaction, buying and selling for its own account and becoming the purchasing agent for clients with regard to the use of their trade dollars. About seven to ten corporate barter companies do about 95 percent of the corporate trade business.
Corporate barter as it is practiced today originated in the late 1960’s. At that time, corporate barter was primarily a financial tool – a way for companies with excess or obsolete inventories to recover costs and even full wholesale value for their inventories. Today, corporate barter both remains a profitable alternative to markdowns or liquidation and provides a valuable way to expand a company’s advertising and marketing plan using the leverage of a barter transaction. Corporate barter also facilitates foreign trade with countries that have goods and services to exchange but no hard currency.
Examples of corporate trade are numerous: unfilled trucking on return trips, idle plant equipment, excess maintenance inventory, years on a lease when a company moves, and even stock in a firm. Privately held companies sell restricted stock for trade dollars to offset marketing costs that will help build name recognition and market share, to build trade dollar reserves or to purchase hard assets such as real estate.
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I wonder how could be avoided the obvious temptation of the buyer/seller to trade “around” the barter network, once they know each other…is there such a safeguard?
While it is always possible for two members of an exchange to trade directly with one another and circumvent the exchange, it doesn’t happen often. There are risks associated with two parties doing a direct trade and more often than not, one of the parties gets less than anticipated or sometimes nothing at all. In addition it isn’t often that Member A wants to purchase the product or service of Member B, and that Member B also wants to purchase the product or service of Member A. Even if this does occur, the price of the two party’s trades may not be the same and one party will end up still owing the other party.
Barter Exchanges act as a third party record keeper, but similar to credit card issuers, they also safeguard a buyer against fraudulent or improper transactions. An exchange will often reverse a trade transaction after a buyer reports a legitimate dispute. Buyer protection doesn’t exist when doing direct trades.
Exchanges have many safeguards that mitigate direct trading, which are typically detailed in the Exchange’s Trade Rules & Regulations. These include penalty fees of two to three times the standard fees for doing a direct trade, perhaps seizing the member’s trade dollars as liquidated damages, or even closing the member’s account,
In addition, once an exchange finds out about a direct trade, and they always do, the exchange will typically no longer be motivated to service their account, will not inform them of new trade opportunities and will not refer any new business to them.