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A barter economy is one that lacks a commonly-accepted currency, so all exchanges must be made with goods and services because money does not exist in these economies.

Bartering also exists in established economies and operates parallel to monetary systems, although to a more limited extent.

Barter transactions are usually bilateral but can be multilateral. The advent of online bartering sites has made multilateral bartering more common.

Common use

A barter transaction is the exchange of goods or services, in exchange for other goods or services.

Bartering benefits companies and countries that see a mutual benefit in exchanging goods and services rather than cash, and it also enables those who are lacking hard currency to obtain goods and services.  

An example of a simple bilateral barter transaction would be a computer supplier providing computer equipment to an internet site. Rather than receiving cash payment, the computer supplier will receive free advertising on the customer's website.

Barter has developed into a sophisticated tool that can sometimes help businesses increase their efficiencies by monetizing their unused capacities and excess inventories.  

Modern 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. 

The advent of online bartering sites has made multi-lateral bartering more common. A trade or barter exchange is a commercial organisation that provides a trading platform and bookkeeping system for its members or clients. The member companies buy and sell products and services to each other using an internal currency.

Businesses earn trade credits (instead of cash) that are deposited into their account. They then have the ability to purchase goods and services from other members utilising their trade credits; they are not obligated to purchase from who they sold to, and vice-versa. 

Cost

Simple bartering involves no cost as this involves exchanging goods and/or services of the same value.

A barter exchange operates as a broker and bank in which each participating member has an account that is debited when purchases are made, and credited when sales are made. Compared to one-to-one bartering, concerns over unequal exchanges are reduced in a barter exchange.

The exchange plays an important role because it provides the record-keeping, brokering expertise and monthly statements to each member. Commercial exchanges make money by charging a commission on each transaction on either the buy or sell side, or a combination of both. 

There are costs associated with online bartering exchanges. Typically, there will be an initial registration fee or a monthly membership fee of between £20 and £40. The barter exchange will charge anything in the region of 5% and 10% on transactions.

The worldwide organised barter exchange and trade industry has grown to an $8bn a year industry.

Timeframe

As long as the right match exists, bartering transactions can be organised instantly.

An online bartering account can be set up in as little as one week. The business will be subject to credit checks.

Advantages

  • bartering benefits companies and countries that see a mutual benefit in exchanging goods and services, rather than cash
  • it enables those who are lacking hard currency to obtain goods and services
  • in the case of a simple barter transaction, there will be no cost
  • suitable for short-term borrowing needs
  • generally easy and quick to arrange, with immediate access to funds once facility has been agreed
  • a credit facility can be arranged as part of membership of an online barter exchange
  • the facility amount can be tailored to suit business needs including both cashflow and back up against unexpected expenditures
  • funding is received without the need to give up a share of the business in return
  • transaction and membership fees are normally tax deductible
  • due to its short-term nature the balance of any credit facility  overdraft is not normally included in the calculation of the business's financial gearing 
  • transaction charges are predictable.

Disadvantages

  • inflexibility; it may not always be possible to find the right ‘match'
  • no receipt of cash for the goods or service provided
  • barter exchanges may charge a commission on each transaction; typically between 5% and 10%
  • membership fees and/or monthly charges will apply. 

Other options

The right finance for your business section of the site gives examples of financial structures that are suitable for different trading types and sizes of business.

Last updated: 29 Jun 2012