Pulling B2B Bartering From Underground And Into A Cash-Management Strategy

For large, global enterprises with the resources to invest in forecasting technology and agile supply chains, matching product or service supply with demand is often ingrained in the business model.

Yet even the most established firms can struggle when a globally disruptive event like the pandemic entangles supply chains and throws off the balance of supply and demand.

Small- to medium-sized businesses (SMBs) were especially exposed to this risk and its financial consequences. For some SMBs, slow-moving inventory turned into wasted capital; for others, sudden demand surges were left unmet without the cash to purchase the resources or products they need.

It’s an environment in which the ancient practice of bartering might come in handy. Canada-based BarterPay Founder and CEO John Porter spoke with PYMNTS about how the bartering system can benefit businesses that need agile ways to source services and products, or benefit from the unused inventory they hold. Yet placing a modern twist on this age-old tactic will be key to helping the most SMBs obtain bartering’s cash flow benefits.

Coincidence Of Wants

Most SMBs are probably familiar with the concept of bartering and may have even engaged in the practice already. The ice cream shop on the corner offering a pint in exchange for a bouquet from the florist down the street will be a familiar scene to many mom-and-pop fronts.

There is a larger opportunity to take this concept and optimize working capital and cash flow through bartering, although engaging in bartering in the traditional sense comes with its own challenges.

“Bartering in and of itself is the oldest form of commerce,” Porter said. “That’s how business was invented. But for two parties to enter into a fair trade, each side has to want what the other person has at the same time, and at the same value.”

This is called the “coincidence of wants,” he said, and while it might be easy to find when it’s an ice cream cone or flowers being exchanged, it’s far more difficult to find this common ground when more valuable products or services are being offered.

BarterPay emerged to address that challenge, creating a digital marketplace through which businesses can offer up their excess inventory or time available to provide services. The key, explained Porter, is that those businesses do not have to exchange that spare capacity for another good or service right away.

Rather, businesses on the portal exchange the capacity for so-called Barter Credits, each one being equivalent to one Canadian dollar. When that business needs a service or product, they can exchange those credits on the platform.

The system isn’t suited for everyone, of course.

“Things like commodities and fuel and lumber” may not be the best fit, said Porter. “Apple isn’t going to join BarterPay. They sell 100 percent of what they produce.”

Firms without spare capacity or with particularly thin margins may not be positioned to wield bartering, but for pretty much every other kind of business — from health and wellness to business machinery to marketing firms with billboard space — the opportunities can be nearly endless.

Out From Underground

An essential component of modernizing the B2B bartering process is to pull the workflow into a digital ecosystem, having a third party facilitate these cashless exchanges. But there are broader implications for making B2B payments with goods and services, not cash.

Indeed, while bartering can be an effective cash flow management tool, it also presents significant risks. Traditionally, bartering occurs in the shadow economy, without official records of what is being exchanged and with whom. This presents plenty of opportunity for nefarious activity.

For BarterPay, having Barter Credits recognized as a cash equivalent by the Canada Revenue Agency (CRA) is an important part of legitimizing modern B2B bartering, not only to reassure the businesses engaging in the practice, but promoting transparency and compliance in the space as well.

“The CRA really likes what we’re doing because we take some of the underground economy that isn’t tracked and traced, and we bring it aboveground,” said Porter, adding that there are full transaction records for every exchange that occurs on the platform.

Incorporating participants from the traditional financial services space is also an effective way to drive legitimacy and transparency in the ecosystem. Most recently, BarterPay announced a partnership with credit union Meridian, which will offer its own SMB members access to the platform as another cash flow management resource.

With the pandemic exposing the financial fallout of unused inventory and services, and with cash management imperative to the survival of so many SMBs today, exploring all options to retain the value of that capacity cannot just reduce waste, but actually put that capacity to use for other goods and services SMBs need to thrive.

“Every business has spare capacity — if you’re a service-based business, you have time and space that go unsold and expire to zero value, and every product-based business has idle inventory that, from time to time, they need to heavily discount and try to move,” Porter said. “If we can create a way for businesses to convert that spare capacity into value in real time that didn’t expire and that could be traded for something else, that could be a great solution to help small businesses conserve cash and grow their business.”