They traded cows, skins, horses, tobacco, sugar, corn and probably jugs of whiskey in exchange for whatever goods they needed. From the Native Americans to the early settlers, bartering was the staple of the American economy before the invention of paper money in the 18th century.
Although the dollar is the standard form of trade in today’s world, bartering remains as a way for companies to save money and hold onto cash reserves. The big difference between then and now is that bartering exchanges have cropped up as viable business opportunities for financially savvy entrepreneurs who assemble a network of businesses interested in trading goods. Brokering trades for companies has become a lucrative career for many, like Tom McDowell, executive director of the National Association of Trade Exchanges and owner of a Cleveland, Ohio-based company, ATX, The Barter Company .
McDowell said there are about 500 bartering exchange companies in the United States and Canada; however, he said that about 200 of those companies are brokers working for large corporations. “Sixty-five percent of large companies have barter divisions,” he said.
According to association statistics, bartering accounts for more than $2 billion in goods traded among North American companies. And 84 of the 500 bartering exchanges belong to the national trade exchange association, which offers its members several advantages, McDowell said.
The average trade volume of a bartering exchange is between $3.5 million and $4.5 million annually, but McDowell said the number is higher for association members. “Our members are averaging $6.3 million in trade volume with an average client base of about 670 businesses,” he said. The national association, which is celebrating its 20th anniversary, calculated its figures in collaboration with the International Trade Exchange.
McDowell has been in the bartering business for 23 years. “I actually used the barter system to establish a publishing business,” he said. He sold the publishing company, dedicating his time and energies to the national association and his bartering company.
“Bartering is a tremendous way for people to increase their business without increasing their overhead,” McDowell said. And joining a bartering exchange enhances a company’s chance for trade opportunities while eliminating the footwork necessary to uncover those opportunities, he said.
“The first job of a bartering exchange is to become a sales department for the member company,” McDowell said. The members inform the exchange of their needs, and the exchange finds other member companies able to fill those needs. The search widens if the exchange is a member of the national association – companies can then access any of the association-related exchanges for trade opportunities.
“It all works similar to a bank,” McDowell said. “The exchange establishes an account for each company, and everything traded is reduced to a monetary value.” A debit is created when the money is spent and a credit is built when the company trades its services, he said. When companies barter between each other, without the exchange, there is a direct product swap, and McDowell said that’s not so with exchanges. “For example, if a business journal trades out advertising for a $10,000 credit at the Outback Steakhouse, the business journal never has to set foot in the Outback,” he said. “The $10,000 credit goes into the account, and the business journal can use it to barter for whatever services they need.”
The exchange never solicits a member company’s cash paying customer for trade purposes. “A rule of thumb is if you’ve been a cash customer during the last 12 months, like the business journal’s cash advertiser, the exchange cannot go to them for trade purposes,” McDowell said. “The big advantage to the exchange system is that the company is always intercepting new customers.”
The exchange earns money through fees and percentages. “A membership sign-up fee is about $300 to $600,” McDowell said. “And transaction fees are based on a 12-to-15 percent trade value, split between the buyer and the seller.
Exchange members are usually small to medium-size businesses, and each exchange tries to limit its duplication of member businesses depending on the size of the market. “Through the exchange, you can trade anything from college educations to funeral services,” McDowell said. “The exchange acts as a clearinghouse.”
At the end of the day, it’s important to have a network like this, said Tyler Smith, owner of Denver-based Cornerstone Barter. Smith said an exchange offers a “managed experience” for outsourcing marketing efforts. “It’s a low risk, low cost way of generating business and trying out new markets,” he said. “Hopefully businesses are spending their credits to drive in more cash business.”
Whatever the trade, another hard and fast rule is no price gouging, Smith said. All transactions have to be in line with “whatever is being charged on the street,” he said.
Smith started his exchange after a career in the banking industry. Cornerstone Barter is just getting off the ground with about 40 businesses in the Denver area, with plans to bring in members from other Colorado communities, like Colorado Springs and Fort Collins. Smith is charging a $200 membership fee and a 6 percent buying and selling transaction fee.
He is a member of the national association and advocates the benefits of the association’s support and its two annual conventions. “The association is a pioneer in the bartering industry, and it brings consistency to the business and the sharing of the best practices,” Smith said.
“Bartering is an age-old concept – the oldest form of commerce. It’s the old milk -for-eggs concept.”
Adding a team to broker the milk-for-eggs transaction is a new-age concept, but one that works for about 200,000 businesses (according to the national association) in North America.