Barter – The Know How

Rishi AnandThe content is based on my knowledge & research on the subject.

What is Barter?

The oldest system of trading.Is the exchange of goods & services

between two parties without any involvement of cash.

Meaning: Barter is a medium in which goods/services are exchanged directly without a common unit of exchange (MONEY)

Basics of BarterExists parallel to the monetary system in an

economy.Usually replaces money as a method of exchange in

times of monetary crisis or when currency is unstable.

No economy has only relied on barter.In recent times it is more of a local phenomenon.

However some global exchanges also exist.Leverages the unused inventory.Turns resources into purchasing capacities at the

hour of need.

Evolution of Barters….History can be traced back to 6000BC.First introduced by the tribes of Mesopotamia.Initially used to trade weapons, food items, tea and

spices.Even Roman soldiers salary was paid in barter by

offering SALT.There have been proofs that purest form of barters

were existing till 1874.Sometimes, monetary crises fuelled the revival of

the barter system, and the current recession has once again set a stage for its comeback.

Limitations of the Old Barter System

Double coincidence of Wants: Exchange can only happen if both the parties

agree to trade. No single party can complete the deal.

Indivisibility of commodities: It was really difficult to measure and divide a

commodity without the loss in value. In most cases either the commodity was indivisible or a consensus wasn’t reached.

Limitations of the Old Barter System

Absence of Store Value: Wealth could not be stored, as most of the

commodities were perishable in the long run and non-monetary.

Absence of Standard Value: Since there was no medium available to value a

commodity, thus reaching on a consensus was difficult. How much to be exchanged was a question mark. Under such conditions one party had to suffer.

Benefits of Barter System

Leverages unused Inventory: In modern era, even the unused

inventory can be traded and products / services of value can be exchanged.

Reduced Cash Outlay: Any organization shall prefer to procure

products/ services on barter and thus reducing the cash outlay. Cash spends are replaced by self made products.

Benefits of Barter System

Opens New Market: In recent times, barter expands the

horizons and also opens new markets. Org’s doing barters in a network - then bigger the bigger the network higher are the chances of new markets.

Increases Sales: The leftover or unused inventory can

bring in products of value under barter exchange. Thus sales increase and virtual cash is generated.

Solutions from Barter System

Suppose the country is densely populated. Then how is it to develop? Can the problem be solved through barter trade? The problem can be solved through commercial transaction or barter trade. Say there is surplus food or hide or leather or jute in one country; and there is another country which is willing to enter into barter trade with that country in order to meet its shortages – won’t the problem be solved? Burma has a shortage of leather and hide, and Bangladesh has a surplus of leather and hide, but a shortage of rice; can’t there be barter trade between them.

New age Barter…Modern trade and barter has developed into a sophisticated tool to help businesses increase their efficiencies by monetizing their unused capacities and excess inventories. The worldwide organized barter exchange and trade industry has grown to an $8 billion a year industry and is used by thousands of businesses and individuals. The advent of the Internet and sophisticated relational database software programs has further advanced the barter industry's growth. Organized barter has grown throughout the world to the point now where virtually every country has a formalized barter and trade network of some kind.

Trade Exchanges – The new conceptModern barter and trade has evolved considerably to become an effective method of increasing sales, conserving cash, moving inventory, and making use of excess production capacity for businesses around the world. There are many organisations which operate as a Trade Exchange and facilitate the barter trade.

Trade Exchange is a commercial organization that provides a trading platform and bookkeeping system for its members or clients.

Trade Exchanges – The new concept

The exchange plays an important role because they provide the record-keeping, brokering expertise and monthly statements to each member. Commercial exchanges make money by charging a commission on each transaction either all on the buy side, all on the sell side, or a combination of both. There are approximately 400 commercial and corporate barter companies serving all parts of the world.

Corporate Barter

Corporate barter focuses on larger transactions, which is different from a traditional, retail oriented barter exchange. Corporate barter exchanges typically use media and advertising as leverage for their larger transactions. It entails the use of a currency unit called a "trade-credit". The trade-credit must be known and guaranteed (contract to eliminate ambiguity and risk)

Barter across the Globe

It is estimated that over 350,000 businesses in the United States are involved in barter exchange activities.

Several major cities in the U.S. and Canada do not currently have a local barter exchange. There are two industry groups, the National Association of Trade Exchanges(NATE) and the International Reciprocal Trade Association(IRTA).

According to the IRTA, more than 400,000 businesses transacted $10 billion globally in 2008 — and officials expect trade volume to grow by 15% in 2009.

Organized barter has grown throughout the world to the point now where virtually every country has a formalized barter and trade network of some kind.

IRTA – The Powerful Body The International Reciprocal Trade Organisation is the global

branch organization that promotes proper accountability rules, equitable standards, standards development and governmental relations, for the industry of Trade Exchanges (or Barters). Its members are situated Japan, China, Australia, Mexico, Canada, the United Kingdom, Argentina, Chili, Colombia, Turkey, Malaysia, Singapore, the U.S., Germany and the Netherlands. It is based in Rochester (New York US). The current president is David Wallach.

Around 500.000 businesses are involved in a Trade Exchange. There are approximately 600 commercial and corporate barter companies serving all parts of the world. Around 100 of the more professional Trade Exchanges organised themselves in the IRTA.

The main achievement of IRTA in the US is the recognition in 1982 of Trade Exchanges by the IRS as third party record keepers, signed into law by President Reagan in The TEFRA Act.

Scope of Barters in India….Indian Retail sector is the next booming sector

after I.T.

According to World Trade Organization report India will be the 5Th largest retail consumer market.

Indian market is increasingly becoming non-monetized. 10 – 20% of inter firm transactions are happening on barter…

Source : WTO report

Growing Appeal for Reciprocal Trading in India

Reduced cash requirements.Larger and more diverse membership

directories.Higher volume of business.Realization of barter as an effective

distribution channel for assets, excess inventory & unused capacity.

Barter – An Emerging Tool Save & Optimize Cash:

As it facilitates organisations to purchase essential business needs by exchanging what they have , thus not affecting their cash out flows.

Liquidate Excess Stock:Barter enables companies to efficiently liquidate excess stocks /

capacities, which otherwise is blocked inventory or unutilized capacity for them. Companies may trade their stocks to get in return products & services they would otherwise be spending cash on.

Open whole new & undiscovered markets:Barter supplements a company’s existing cash business and opens

new market segments, since companies would rather choose barter suppliers of products / services they require, than pay in cash. These new customers eventually also become potential cash clients.

Barter Is Smarter…The truly successful barter programs are, for the most part, locally owned and operated. Most independents and professionals don’t care for the idea of being administered and billed by some computer in Timbuktu. Most of the interstate and intercity barter bonanzas are a myth, as well as a great tool for franchise sales; too many would-be-barterers have been cinched with the promise of a Caribbean cruise or exotic lakeshore property in romanceland. Local level business and professional men and women have sufficient gray matter to initiate and operate this fine concept. It is a low-overhead operation and requires little capital to get started. And as the ailing dollar creates a continued series of market convulsions, barter is one move toward economic survival. It creates new hope, new business, new profits, the closeness of a fraternal society and, above all – it’s fun! – By : Jesse Cornish

LET US BARTER