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THE NEW AGE OF BARTER

• Why Barter?

• Who Barters?

• International Barter and Counter Trade

• Government Views

• Technology Behind Modern Barter

• Barter Companies

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WHY BARTER?

• Profit

• Increased Buying Power

• Utilization of Surplus Capacity

• Increased Market Share

• Upgrading Manufacturing Capabilities

• Preservation of Hard Currency

• Expansion of Products for Export

• Access to New Markets

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WHY BARTER? PROFIT

The primary reason business owners and professionals barter are to increase sales, gain new customers and conserve cash. Through associations with barter exchanges and corporate barter companies, businesses can accomplish all three. Companies of all sizes and industries are seeing the value of bartering. From the small restaurant owner that wants empty tables filled to the multi-million dollar manufacturer that wants to avoid a loss on the balance sheet, barter is more and more becoming a preferred option.

In the case of the restaurant, if the owner is operating at only 65% capacity, he has an excess capacity that has not been tapped. If they offer their services to a barter exchange, they can bring in new customers. The trade dollars generated by the new business can then be utilized to purchase carpet cleaning, paper napkins, or advertising. All of these conserve cash and improve the bottom line.

With the manufacturer, if they are challenged with an inventory that is slow or non-moving, they are likely going to have to liquidate it at 10% - 15% of the wholesale value. This will show as a write down or a loss for the company. Corporate barter companies will pay the prevailing wholesale pricing for the inventory and aid in the unwind of the trade credits thus preventing the loss on the balance sheet and ultimately saving cash on future expenditures.

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WHY BARTER? INCREASED BUYING POWER

Trade dollars are in many cases much easier to acquire then cash dollars. By utilizing the margin in a product and service, barter allows companies to always purchase at a discount. If the manufacturing cost of an item is $10 but you can trade that item at its’ wholesale value of $16 for printing, the $16 dollar print job only cost you $10.

In situations where companies have strict budgets or have spent their financial allotment, the purchase of services like media and travel can be bartered for thus not exceeding budgetary restraints and in turn increasing purchasing power. Many companies use barter to augment their advertising budgets which in turn bring them additional cash clients.

If the inventory was one that was going to be liquidated at 10% of value, it is easy to see why the popularity of barter is growing worldwide.

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WHY BARTER? UTILIZATION OF SURPLUS CAPACITY

Surplus capacity can be a pitfall of all types of companies. In Far East Russia for example, there are tremendous natural resources as well as an industrial infrastructure that is under utilized. There are manufacturing facilities that have ceased production because they cannot pay for the raw materials necessary to operate. In a barter transaction, the excess capacity of a manufacturer can be leveraged to purchase these materials and ultimately increase productivity. Here is an example of a transaction:

Several Russian mink farms were challenged with how to afford to feed their minks. The reputation of the quality of Russian furs had been on the decline for several years and the impact was being felt. Decisions had to be made as to whether they could sustain another season.

The situation: No money available for mink feed

The Problem: Starving minks make poor pelts and result in lower earnings.

The implication: Without a solution, the farms would cease

The need: A way to acquire high quality nutritious feed for the minks

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WHY BARTER? UTILIZATION OF SURPLUS CAPACITY

Barter allowed a meat company in New Zealand to take the fodder, or “scraps,” leftover during their manufacturing process develop it into a freeze dried, dog food like product which was then sold for trade dollars. The feed then was traded to the mink farmer for a pelts that were harvested. The barter company then sold the mink pelts for cash.

What was accomplished?

The mink farm produced the highest quality pelts in recent years. This was accomplished with no cash cost to the farm. The farm saved cash by not having to purchase food.

The meat company in New Zealand has utilized a surplus capacity that they had not even been aware of and developed a new market for all of it’s products.

The barter company converted trade dollars into cash dollars. Everyone came out a winner. (except the minks).

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WHY BARTER? INCREASED MARKET SHARE

Many companies are interested in gaining a foothold in new markets both domestically and internationally. Barter is a strong tool for entering a market that may not otherwise have been receptive to the product or the producer.

In one case, a large industrial machine manufacturer was interested in entering the Russian marker place but was not able to overcome existing competition from other US interests in Russia. Through barter however, they are able to sell into the depressed economy and take back products that are then sold for cash to cover their investment and produce a profit.

A printer manufacturer was facing the liquidation of several thousand printers that were obsolete. They were able to trade them for advertising and printing services on which they had intended to spend cash.

When the printers were re-marketed and distributed by the barter company, the printer manufacturer realized increased consumption of their printer supplies and a stronger market share.

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WHY BARTER? UPGRADING MANUFACTURING

CAPABILITIES

Another compelling reason that businesses look at barter is the ability to expand operations without financing or outlay of cash.

One example of this is a computer training company (New Horizons) that needed to increase the number of locations that it offered classes. A company they were soliciting had chosen to do business with a competitor. The company receiving the training had invested in twelve new computers and all the software required to train their staff and then dedicated space for the classroom. The competitor training company only needed to provided the courseware and the instructor. They used the room once per week to train the company’s employees.

New Horizons made a second attempt at wining this business. This time they offered to barter the training that the client needed in exchange for the use of the classroom during the remaining 5 days per week.

The company received their training on-going with no additional outlay of cash and the training company received an additional location without the need to lease office space and purchase computers and software. Combined, the two companies saved an estimated $42,000.

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WHY BARTER? PRESERVATION OF HARD CURRENCY

In economies where currency is in flux or has little or no value outside of it’s borders, barter can be the only way to initialize international trade. In many developing nations there are limits on the amount of currency, particularly the US Dollar, that a company may spend across borders. Preservation of this currency for priority usage is an essential part of many overseas businesses. Whenever there is an opportunity to purchase internationally without spending the limited cash on hand, they are delighted.

In North Korea, there are restrictions on US companies that prevent the spending of US Dollars with North Korean companies. The only way we can bring products out of this country is in barter and counter trade arrangements.

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WHY BARTER? EXPANSION OF PRODUCTS FOR

EXPORT

New Zealand and Turkey have demonstrated successfully how barter can expand international distribution channels and become a profitable venture. In New Zealand, a bottled water manufacturer is exporting their bottled water to the United States. Here it is being traded for credit with hotels and resorts all over the country. Some of the hotel credit is being returned to the water company and the balance is being kept by the barter company.

A Turkish towel manufacture is exporting towels to the US for us in hotels as well. In this case, the towel manufacturer is taking back trade dollars which are internationally recognized and valued 1:1 with the US Dollar and is spending them in their local economy on business related products and services.

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WHY BARTER? ACCESS TO NEW MARKETS

All of the aforementioned items in one way or another help companies expand locally or internationally. They open doors into places restricted by trade embargoes, they give value to economies that otherwise would be valueless, and they solve problems in a more equitable fashion then conventional business practice allows.

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WHO BARTERS?

Manufacturers barter because they receive more equity from unwanted surplus or obsolete inventory then they would realize in a cash liquidation.

As long as a company is spending money, they are a candidate for barter.

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WHO BARTERS?

• Manufacturers

• Media Companies

• Hospitality Companies• 400,000 US Businesses (IRTA fact sheet)

• 30 Percent of the Worlds Total Business (US Department of Commerce)

• $8.5 Billion Annually (IRTA fact sheet)

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INTERNATIONAL BARTER AND COUNTER TRADE

• Counter trade

• Offset

• International Trading Partnerships

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INTERNATIONAL BARTER AND COUNTER TRADE

International barter is comprised of two separate elements: counter trade and international reciprocal trading. Counter trade constitutes large single transactions between governments or multinational corporations – or where government approval or assistance will be necessary. There is also the likelihood than an offset will be required in order to facilitate transacting.

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INTERNATIONAL BARTER AND COUNTER TRADE

An example of offset is a case in which an aerospace company was planning to make delivery of several aircraft to a Grecian company. The Greek government then became involved. They informed the aerospace company that they would only allow the transaction to take place if the aerospace company found a way to provide the Grecian Navy with encryption software for their telecommunications system.

The aerospace could not directly meet the request of the Grecian government as there are laws that prevent the sale of encryption software to foreign governments. It is considered munitions. They contacted a broker who purchased a software development company in Greece and aided in the development of the required software. This is Offset.

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INTERNATIONAL BARTER AND COUNTER TRADE

International reciprocal trading can occur when trade exchanges and/or corporate barter companies have formed trading partnerships abroad. The goal is to either start new or partner with existing barter companies throughout the world and ultimately end up with one international currency. This has been successful in several countries and the bartering in different domestic economies is beginning to transfer into the importing and exporting of goods between these independent exchanges.

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GOVERNMENT VIEWS

All trade dollars form a bona fide barter company credited to an account will reported to the IRS. That is the deal the industry made with the government. On October 1, 1979, the IRS initiated the Barter Project to audit the returns of all barter exchanges and a sample of their members. After the enactment of the Tax Equity and Fiscal Responsibility Act of 1982, which established a 1099-b reporting system, the IRS Barter Project was formally terminated.

This made the barter industry above board and legitimate. The government views barter as an acceptable business practice and trade dollars are treated the same as cash (except that the IRS wont accept them as payment).

Barter income needs to be viewed the same as cash income. There are no inherent tax advantages or disadvantages just because you use barter. Barter is a marketing tool, not a tax tool. Generally speaking, as with cash income, barter purchases that are business related are deductible, and conversely, barter purchases that are made for personal use are not.

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GOVERNMENT VIEWS

We are in essence the creators of our own currency. This is an electronic currency that is backed by the commodities and products in the exchange however and we do not “sell” our currency to our clients. We are record keepers by government definition. The US Treasury makes its money by the sale of new money. This practice has been going on for centuries, the value of the metal in a nickel is not nearly worth a nickel.

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TECHNOLOGY BEHIND MODERN BARTER

• The Personal Computer

• Barterwire• Internet Explosion

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TECHNOLOGY BEHIND MODERN BARTER

Paul Suplizio of the IRTA traces the advent of the modern barter system to the birth of the personal computer in the 1970s. “Trade exchanges would never have gotten off the ground without them. You couldn’t keep track of all the transactions manually,” he said, especially the little deals, such as the guy who buys his wife flowers on barter. The cost of recording such transactions would be to great if done manually. “Computers are necessary to keep track of transactions, maintain accounts, create bills, compute commissions, issue monthly statements, and render information to the IRS.

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TECHNOLOGY BEHIND MODERN BARTER

Barterwire was the major electronic network linking the barter industry. With a modem and a PC, clients and brokers could access the data bank from anywhere with a phone. The system was an international version of electronic bulletin boards that proceeded Internet popularity. This was the first of many innovative steps that legitimized the barter industry.

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TECHNOLOGY BEHIND MODERN BARTER

The Internet explosion that has rocked the nation and the world for the past three years has had a profound affect on the barter industry. Clients and brokers all over the world have instant access to the available items of numerous trade exchanges. Barter malls have replaced the classifieds with full graphics of the merchandise. The electronic economy of barter has almost come full circle. As it continues, it in some cases renders cash obsolete and practically a nuisance. After all, cash can be lost or stolen. With a trade account, there is no wad of bills, no automatic teller machines, on one with a knife or gun who can relieve you of your wealth. What has been created is a true electronic currency that is commodity-based.

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BARTER COMPNAIES

There are three distinct levels at which today’s Barter Industry operates:

• Retail Exchanges• Corporate Barter• Media and hospitality

•

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BARTER COMPNAIESRETAIL TRADE EXCHANGES

These are associations of merchants and professionals who barter their surplus products and services among themselves. The trade exchange in essence is a clearing house for this excess. The barter transactions are tracked buy the use of “trade dollars” which are simply an electronic method of keeping score on what goods and services have been bought and sold. As with a bank, trade dollars are credited and debited into the accounts of each business. Each client is serviced by a broker who helps the clients spend and acquire trade dollars. These brokers rarely function as principles in these transactions. Under U.S. Law, barter exchanges operate as third party record keepers. Transactions in retail barter are typically made on a 100% trade basis.

Exchange administrators generally earn their living by helping their clients make money. Each client has a Broker that brings them new customers and new sales. They usually charge a commission for this service. They then have the responsibility of helping the client conserve cash by finding things to spend their newly acquired trade dollars on. Again they expect to earn a fee for professional delivery of this service. These fees range from 10% - 15% and in a sophisticated system, are split so that the client pays ½ on the acquisition of trade dollars and ½ as they spend the credits.

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BARTER COMPNAIESCORPORATE BARTERManufacturers, wholesalers, and distributors often

trade excess inventory for “trade credits” rather then take a loss on a cash sale in a liquidation situation. Typically, a cash liquidator will offer $0.10 - $0.12 on the dollar for surplus or obsolete inventory. In a barter transaction, the manufacturer can realize up to 60% more equity from their goods. According to the International Reciprocal Trade Association, corporate barter is forecast to triple to $21 billion in the decade following 1996. This will bring one out of four businesses of significant size into the barter industry.

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BARTER COMPNAIESRETAIL/CORPORATE DIFFERENCES

The main difference between corporate barter companies and retail trade exchanges is that the corporate traders act as a principle in the barter transaction. Corporate traders are buyers and sellers. They make money on the resale of the merchandise they acquire on barter. Inventories are either sold for cash, or traded into other products.

Transaction size is also note worthy. In a retail barter exchange there are thousands of small transactions ranging from $50.00 to $1000.00. In corporate barter, the size of a single transaction will vary from $50,000 to $5,000,000. The deals are specialized and much more creative then the retail market sees.

Trade exchanges deal with Trade Dollars and corporate traders deal with media credits, purchase credits, and cash equivalent credit. These are considerably different from each other.

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BARTER COMPNAIESMEDIA / HOSPITALITYMedia and hospitality are two industries that

work hand in hand with barter companies. They are what are called “soft” products. Vacation spots and hotels have found and appreciate that trade dollars are better then vacant rooms, especially when they can use trade dollars to buy advertising, towels, or bottled water.

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BARTER COMPNAIES

According to the IRTA (International Reciprocal Trade Association) there are over 400,000 businesses involved in organized barter. This is an estimated $8.5 billion per year industry and that is expected to triple during the next decade.

The US Department estimates that 30% of the business being done in the world today is some form of barter.

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BARTER COMPNAIES

Here is a sprinkling of the many barter companies both here in the states as well as internationally. Many of these companies have international operations and most have areas of specialization. Active International and Tradewell for instance work almost exclusively with media inventories while Global Marketing Resources is heavily involved with travel.

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BARTER COMPNAIES

• Active International• Barter Card• Corporate Barter

Council• CSI International• Global Marketing

Resources• ICON International

• ITEX Corporation• Media Barter Associates• Media Resources

International• The Trade Exchange• Tradewell• TradeBanc• Warner Media

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TradeBanc brings Trade into the 21st Century

• Internet-Based

• Trade between Exchanges

• Universal Trade Currency

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Open an account and start to e.Barter today!

The following was developed from a presentation by William Knaak from

the ITEX Corporation