Economy and Small Business

Need something? They'll trade you: Industry consolidation is remaking bartering terrain

June 30, 2008

Marketing firm owner Lorraine Ball knows how to promote a business-a valuable commodity among cashstrapped entrepreneurs looking to bolster their bottom lines.

So it's little wonder that she is able to trade her expertise for services she needs, whether it's help with an online video or time with a personal trainer.

Ball is among a growing group of small-business owners embracing the age-old barter system, methaphorically scratching one another's backs to save on cash and credit.

Although Ball prefers to handle trades informally, working only with people she knows to get services she really wants, many of her small-business brethren are going a different route: formal trade exchanges, where members pay fees and commissions to a company that tracks their trade credits.

In the past three years, the formal bartering terrain has changed as national companies swooped in and bought out locally owned exchanges, giving what used to be a citywide network a national and international reach.

At the forefront of the consolidation are ITEX Corp. and International Monetary System, both publicly traded companies and the only surviving trade exchanges in Indianapolis. As the economy slides, these larger, stronger networks are seeing an uptick in interest.

"This is an industry that does extremely well when things get a bit tight in the economy," said Tom McDowell, executive director of the National Association of Trade Exchanges, an Ohio-based trade group.

That's the case in central Indiana too, local company officials report.

"Cash is drying up because of high gasoline prices and other costs," said Vickie Reynolds, who runs the local ITEX franchise with her daughter Sarah. Reynolds got in the business about four years ago, operating a local BXI Exchange Inc. franchise; ITEX purchased that company in 2005.

Her franchise, which covers Indianapolis and Columbus, oversaw $2.3 million in trade in 2007, an increase of 35 percent over the previous year. It has 255 local members and is on track to grow to 500 members by the end of the year, Reynolds said.

Wisconsin-based IMS has 18,000 members and a network of company-owned local offices. It got into the Indianapolis market in late 2006, when it bought locally owned Barter Indiana Group. It has 133 central Indiana members.

At IMS, officials said they've seen a boost in the volume of trading as the economy slows. The company also is preparing a national marketing campaign tied to the trend with the tag line: "Recession looms, barter booms."

IMS has grown by acquiring pre-existing exchanges and addressing existing members' needs, as opposed to heavy recruiting of new businesses.

"A good trade exchange is much like managing an economy," said Krista Vardabash, IMS' director of marketing. She said the company will put some businesses on a waitlist to join if the local exchange already has an overabundance of its service.

"We are very honest with our applicants and make sure members have something that can be sold in the network," she said.

ITEX charges an initial membership fee and both companies charge monthly maintenance fees and commissions. Despite the cost, the trade groups have local fans.

Janet Harris joined ITEX shortly after starting Indianapolis-based Mission Coffee & Tea Co. Inc. nearly four years ago. She sold it in April but liked a few out-oftown trading partners so well that she kept a contract with her bean roaster so she could continue trading.

She has since launched a new business, Pot-Tee Prize Training System, which provides a grab bag of prizes that parents can use to reward good toilet habits during potty training. She's already doing a swift business bartering the bags in the network.

"It conserves cash and I like the idea of small businesses supporting each other," Harris said.

Harris has used trade dollars to buy advertising and restaurant gift certificates; she also has had her house painted, carpets cleaned and car repaired. She monitors her trade account and if the balance gets higher than what she regularly spends, she declines trade requests for a month or two until she's spent down her account.

For Jeff McCullough, owner of Indianapolis-based Preferred Print, the bonus of trade is that it introduces him to clients who otherwise wouldn't have found him.

"If this were cash business, they never would have come to me," he said. But after they see the quality his company can deliver, he has had repeat clients even when he can't do the jobs on trade.

He's a member of both of Indianapolis' exchanges and has been trading for more than five years.

McCullough generally uses the trade dollars for personal, not business, expenses. For example, he has used his trade account to line up hotel rooms, a photographer and vacation packages for his daughter's upcoming wedding.

But he cautions new users to go slowly and only accept a trade if it's a good fit for the company. And owners should set aside cash to cover taxes when they use trade dollars for personal expenses.

That's because the formal trade exchanges send members and the IRS a tax form at the end of the year. Trade revenue is treated as business income. If trade credit is used for business expenses, the company comes out without a tax hit. But if the trade is used for personal expenses, the business owner will need to pay corporate income tax on that portion of revenue.

Informal trades need to be reported, too. Still, Ball has found that handshake barter agreements work better for her.

The owner of Indianapolis-based marketing firm Roundpeg Inc. tried formal trading exchanges years ago, but found that demand for her services meant she was running up trade balances so high they were hard to spend down.

So she swaps informally with fellow small-business owners.

"Honestly, I will almost always prefer to get cash for my services, like most business owners," she said.
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