You may have been a member of a barter exchange and are certain you can do it better. Or you may have read it’s easy to run an exchange from your bedroom with just a phone and a 386PC. Or maybe you attended a business symposium that offered trade exchange franchises.
Ask any of the owners who’ve been in the business a while - a trade exchange is not a piece of cake to start up. Barter IS thriving world wide, but many small business owners don’t know a thing about it. You’re not just enrolling members to your exchange, you’re committing to an ongoing education process for your members and business community.
Barter is not just ‘Let’s Make a Deal.’ A retail trade exchange is a small economy and its currency is a trade dollar. It is management’s duty to operate in a fiscally prudent manner, managing credit lines to maximize the flow of currency while maintaining an acceptable risk level. You cannot come to this position unequipped and ill prepared. The first order of business is research and training.
There are many angles to consider, and the first thing you’ve got to do is the dreaded Business Plan. Get some help from your accountant and/or attorney. Creating a plan will force you to weigh the costs and benefits and to anticipate your need for financing, staffing, equipment and facilities. Many new exchanges believe they can start up at little or no cost. Not true. Even if you work out of your home you’ll incur several costs, some of them substantial.
First, contact your local Chamber of Commerce to obtain information about the business demographics in your target area. How many businesses are there? How many are good candidates for trade exchange membership?
Take a look at your competition. Are there other successful exchanges in your market? Is there room for another? Have local businesses been burned by prior exchanges? If so, your sales efforts will be adversely affected. What will you offer that other exchanges don’t?
If you’re sure you can succeed in your market, take a few moments to consider ...
What will be your business address? Tele-commuting from your home office has become more acceptable (even trendy), but some businesses will still be wary if you don’t have space in a traditional business setting. Office rent varies by location, and even drastically within a city. A realtor can help strike the best deal. An attorney is a must before you sign a long term lease. Office overhead is substantial, but can sometimes be arranged as a trade/cash blend. Factor in utilities, janitorial and common area maintenance.
If you work from your home, consider that in some areas your phone lines will be inconveniently limited or expensive. Try to create a separate work space free from the distractions and noises of children and pets.
Budget for office supplies, paper, stationery, envelopes, business cards, postage, staplers, calculators, etc. They add up pretty fast.
You may start off as a one-man-band, but sooner than later you’ll need staff. Depending on your talents, you’ll eventually need to hire sales reps, brokers and/or administrative assistants. With due respect for minimum wage laws, how will you compensate your employees? Hourly? Bonuses? Commissions? All of the above? Add payroll taxes. Will you provide benefits like holidays, paid vacation, sick time, personal time off, pension plans or health insurance? Remember, you cannot legally provide benefits to yourself and not to your employees - that’s discrimination.
Are you familiar with the federal and state labor laws? If not you could make costly mistakes. Do you know the difference between an employee and an independent contractor? Talk to your accountant. Few of us really want to know, but violating the rules can break you.
Even if you’re working from your home, you’ll need some office furniture and equipment - desks, chairs, and filing cabinets to start. The price of a good phone system reflects its simplicity or sophistication, which depends on your needs. You’ll want at least two phone lines - one for the business and one for the fax machine. Few businesses will take you seriously if you don’t have a dedicated, separate fax line. You might also need a cellular phone and a pager if you’re out on sales calls during the day.
A fax machine is an absolute necessity and good ones are reasonably priced. Of course you’ll need a computer system and at least one printer. You’ll need a computer station for each employee, including yourself.
You cannot operate a trade exchange without adequate software. This is not hyperbole. IRS 1099B reporting requirements dictate that information be filed either electronically or on disk - manual records and paper forms are not allowed. There are programs available that maintain proper trade accounting records including monthly statements and year end 1099B. And some offer contact management features for members and sales prospects, touch tone authorizations, touch tone fax back and other features that allow you to provide the best possible services to your clients. The packages on the market today cost several thousand dollars and all software is not created equal. Carefully compare features, benefits, training, customer service, upgrades, prices and references before you make this important investment.
To find out how TradeWorks can help you succeed, keep surfing this web site!
You know there are several ways to market and advertise your new business. Most exchanges have discovered that no amount of institutional advertising can replace the one-on-one, face-to-face meeting with a prospective member. But well constructed, targeted ads can provide valuable name recognition and perceived legitimacy. Different techniques have succeeded or failed in different markets. There is no rule of thumb. A good marketing specialist may provide invaluable advice. Consider radio, television, newspapers, magazines, broadcast fax (if legal in your state), business-to-business mailers.
Join the Chambers of Commerce in your area - all of them. Go to the after hours mixers, breakfasts and new member orientations. Leads groups and tip clubs are a great source for referrals.
Marketing and advertising carry a price tag. Do your homework up front to prepare an accurate budget for your Business Plan.
Virtually every veteran trade exchange owner will tell you to get your first hundred members as quickly as possible, even if that means waiving the membership fee and earning no revenue for five or six months. It’s difficult to start trading without a solid membership base with a variety of key industries represented. Operating capital and profits are primarily generated by your cash transaction fees which are a percentage of sales and/or purchases. It’s in your best interest to enroll targeted members as quickly as possible and to get them trading quickly.
Are you going to handle all new accounts yourself, or will you recruit and train a sales force? How will sales reps be compensated? If your first 100 members are enrolled free, you’ll need capital to pay commissions to sales reps until membership fees kick in on the 101st member. Do you have sales experience? If not, what kind of training can you arrange?
As already mentioned, the IRS has a whole slew of tax regulations for small businesses, and they differ slightly if you’re operating as a sole proprietor, partnership or corporation. There are different rules for benefit plans, for example. And your pension plan options differ when you’re self employed versus a corporation. Again, consult your attorney and/or tax advisor.
1099B filing requirements are consistent no matter what your legal form. For your non-corporate clients you must file a 1099B for every sales transaction, no matter how small. For corporate clients the annual total is sufficient. Not all software accommodates the regulations, so check before you buy.
There are other expenses and investments, some large, some small. You’ll need a business license to operate. If you’re going to accept credit cards for cash fees, you’ll need a merchant account (thankfully easier to obtain than in prior years). Don’t forget your insurance agent - workers’ compensation and liability insurance are just the basics. You may need expanded coverage if your employees are using their cars for sales calls. If you buy and sell inventory you may need to be bonded. And you’ll need to adhere to your state’s sales tax regulations.
Don’t forget to budget for industry organizations like the National Association of Trade Exchanges (NATE) and the International Reciprocal Trade Association (IRTA), including annual conventions and regional seminars. They are hands down the best opportunities to learn the ins and outs of running a trade exchange - from owners, sales reps and brokers around the world. You may also want to invest in sales and customer service books, tapes and other training tools, as well as the Barter News quarterly magazine and Competitive Edge monthly newsletter.
All this analysis is essential to creating your Business Plan. It’s projected revenues, expenses and cash flows will indicate month by month your need for capital infusion. Don’t forget to factor in compensation for yourself. Unless you have an independent source of income to support your household, you’ll need to raise sufficient capital to support the business and your family for several months, a year, or even two.
What’s the best source of capital? This is an extended discussion between you, your accountant and legal counsel. Personal savings can get you started. You might take on partners (silent or active). Private stock offerings are a possibility, in which case you won’t own the exchange 100%, and you’ll have to answer to stockholders.
Financing is another option. Many owners have used home equity lines of credit or mortgages to raise capital. Small business loans can be arranged, or family and friends may be a source of credit. At this time business interest is tax deductible (unlike dividends paid to stockholders), but Congress reserves the right to change the tax code at any time.
Books and manuals have been written on operating a successful retail barter exchange. Here we’ve only scratched the surface. If you’re just starting, your best bet is a convention of exchange owners who share their successes and failures. There’s no better introduction to the industry than real experiences of owners, brokers and sales reps. Call NATE or IRTA to plan for the next event. If you can’t afford to attend a convention, maybe you can’t afford to start a trade exchange.
Last revised: March 9, 2004
Copyright 2004 by Danny Weibling and Lisa Peters.
All rights reserved.
Send comments to lisa@dwwsoftware.com
