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Exchange System: Cashless trades

Exchange System: Cashless trades
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First Published: Mon, Aug 27 2007. 12 35 AM IST

Updated: Mon, Aug 27 2007. 12 35 AM IST
Although he doesn’t carry too much cash in his wallet, whatever Sushant Saini wants, Sushant Saini usually gets. Yes, the 33-year-old Gurgaon-based project consultant does usually pay by plastic, but he has also been offering his advertising expertise on occasions in return for stuff that catches his fancy. Saini plays safe, though, and swaps only with clients he has been dealing with for a while and is comfortable with.
Smart way to shop? They call it barter, and it has been going on ever since man became civilized. But the mechanism has evolved, and the way barter is being done today is very different from the way people swapped 5,000 years ago—and the way Saini still does.
Today, a number of trade exchanges facilitate swapping a wide range of goods and services even between three or more parties, not necessarily just two.
How the swaps work
Manoj Bhatia, a West Delhi home appliances retailer, saves on cash by offering merchandise in exchange for print ad space worth Rs20-25 lakh a year. He usually routes the transaction through Net4barter Pvt. Ltd and Intrex India Ltd, two trade exchanges that help him reach a number of English language and vernacular newspapers he normally would not have access to.
Bhatia says he is comfortable using the services of a trade exchange for the wider range of newspapers he can tap, without dipping into his pocket or bank balance to avail of the service, or having the publication explore his financial antecedents before accepting his ad.
“There is another reason, as well,” says Rakesh Bhatnagar, co-founder of Net4barter. “In traditional barter, a deal takes place only when you have something I want, I have something you want, both of us think we’re getting a fair deal if we swap, and so we do.” Bhatnagar says this limitation is lessened in the three-way model, because it uses an electronic bookkeeping system that assigns credit points for all sales made by a member on an exchange and debit points for purchases. In Net4barter, Re1 worth of sales or purchases equals one credit or debit point.
So, if Bhatia places an ad worth Rs10,000, his account gets debited 10,000 points. He offers his wares on sale to square off his account, but it isn’t necessary for the publication he advertises in to pick up a water purifier or geyser from him. Any member, who needs Bhatia’s merchandise, can pick it up and help him approach a zero balance in his books.
The newspaper, on the other hand, can redeem its credits by picking up anything else on offer, from any other member on the exchange—from air tickets to appliances, computers to cutlery, holidays to health-care packages, and pens to pest control services.
Why businesses swap
In Bhatia’s case, it is pretty clear—he doesn’t want to spend cash. Bhatnagar says other businesses do it to expand business, enter new geographical locations within the country, or dispose slow-moving inventories. This is possible because of the large database of members available with exchanges. Net4barter has more than 2,000 businesses, spread over more than 150 goods and services on its rolls.
Adds V. Ganesh of Chennai-based Trax Barter Network, an exchange that largely focuses on small businesses: “Barter is particularly useful when an enterprise wants to reward employee-performance with gifts or holidays, but doesn’t want to dip into its cash reserves.” Ganesh says his exchange has even helped businesses going through a financial crunch to pay off their debts by offering merchandise instead of cash.
Getting started
If you run a small enterprise and want to barter, there are a number of trade exchanges you can approach. In most cases, you will have to provide a profile of your company and sign a standard agreement.
Some facilitators, such as Net4barter, also set a pre-specified barter limit on revolving barter limit, beyond which you cannot buy goods. For instance, if the ceiling has been set at Rs10 lakh, and you exhaust this limit, you cannot buy more goods or services until you have redeemed some of your debit points.
While most exchanges do not charge an entry fee, they do levy a transaction fee of up to 10% of the value of the goods bought. If a member, on the exchange you are registered with, buys a mobile phone from you, the facilitator won’t ask you to pay the transaction fee at the point of sale, and will raise a bill only when you redeem that sale by buying something else through the barter exchange.
Who is eligible?
You’ve got to have a running business of reasonable standing if you want to barter. If you’re salaried or a professional who wants to swap goods, the chances are you will not be entertained, as most exchanges find dealing with individuals too risky.
Benefit Barter Co., a Mumbai-based organization, caters to this category, albeit in a very limited manner. “We insist they carry whatever they have to offer to our showroom in Andheri,” says Ruby Agarwal, who runs the exchange.
Bhatnagar of Net4barter says service providers in countries such as Australia and the US allow independent professionals—lawyers, architects, tax consultants and the like—to swap goods on their exchanges, as the barter mechanism in those markets is more mature. But, he adds, it won’t be too long before systems similar to those prevailing abroad are introduced in India. You’ll soon be able to trade without using cash, if you have a reasonably good individual practice (See box: Future Swap).
Swapping guide
Most exchanges permit trades at maximum retail price (MRP) or at prices specified in a member’s rate cards. It shouldn’t be very difficult to convince your exchange a negotiated rate is acceptable to you and the counter-party if it makes commercial sense. For instance, bulk deals at discounted prices would easily be allowed. Do remember to substantiate the negotiated price with paperwork, though. In case you are buying, this will be critical, as your liability to pay the fee and offer equivalent value will stand reduced.
The deal paperwork will also be useful to draw up your firm’s books. Remember, you never barter to save taxes, but only to facilitate your business.
Both Bhatnagar and Ganesh say the income-tax department treats all barter sales and purchases on a par with those done in cash.
A word of caution—if you are looking for goods and services for personal use, and pay for them by offering a gift you have received, but don’t have any use for, or some other personal effect, the taxman won’t make any extra demands. But, if you’re looking for a holiday for yourself and the family and offer some stocks of your business, or service that’s normally chargeable in return, you’ll end up paying the exchequer even if, from your point of view, it wasn’t a business.
Stock allocation
If you’re swapping to augment your business, make sure you have a proper mix of slow- and fast-moving inventory. If your ratio is skewed in favour of fast-moving goods, you’ll soon be staring at a cash crunch. If the bias favours slow-moving stocks, you’ll soon exhaust your purchase limit and your transactions on the exchange will come to a grinding halt, although you will enjoy a longer period of “credit” if you’ve bought first.
Even this is not unlimited, because your exchange will invariably ask you to make good your purchase in cash should it find you haven’t been able to square off the deal for too long. Ganesh of Trax Barter says it is always better to limit your barter sales to 10% of your total inventory. Most exchanges do not allow used goods. Agarwal says Benefit Barter was doing it a few years ago, but has stopped because they often encountered problems relating to merchandise valuation.
Squaring off
Non-fulfilment of your obligations could invite a lawsuit.
Most exchanges have strong client agreements in place and some, such as Net4barter, even have a legal cell to take care of default cases.
Bhatnagar says he rarely has encountered cases of unwillingness to square-off deals.
Ganesh says he would rather not go the legal route but use his negotiation skills, instead. Agarwal is more careful. She expects her smaller members to transport their wares to her showroom and pick up something of equivalent value.
No arbitrage
Membership on two exchanges might up your trade limits, and give you access to larger client and vendor databases, but you can’t buy on one exchange and sell on another. Barter in its modern avatar is new to India, and there is very little data on the size of the industry—but the system looks poised for growth.
While organized barter is still in its nascency in India and very little data, if any, is available on the size of the industry, it is big business abroad. In the US, for instance, goods and services worth $15 billion (Rs61,500 crore) change hands on trade exchanges each year. And 90% of these transactions are retail, involving individuals with some professional background. Rakesh Bhatnagar, co-founder of Net4barter, tells Mintthat while most Indian exchanges are averse to catering to this segment, all that is set to change with the introduction of more sophisticated trade models. Edited excerpts:
Rakesh Bhatnagar
What is about to happen in this space?
You will soon see a complete overhaul in the way the business operates in India, with the entry of foreign players, many of whom are likely to tie up with Indian service providers. For instance, Barter Card, an Australian company, has already announced its plans to enter the Indian barter market.
What does all this mean for you?
We’re prepared. In fact, we are also in talks with a global player. The company has more than 50,000 members, the majority of whom are in the retail space—you know, individual professionals, such as lawyers, architects and tax consultants. I wouldn’t like to disclose the firm’s name.
Okay, so how will a tie-up with this player add value to your operations?
Well, for starters, they will be replicating their fully-automated exchange in India. The system is quite sophisticated and will enable us to reach out to the retail segment and very small businesses.
How does the system work?
Essentially, it issues to the client what we call a trade card, which is akin to a credit card and has a pre-defined purchase limit between Rs22,000 and Rs5 lakh. How much a client gets depends on how his credentials are assessed. A directory of members will also be issued to those who register with us. Unlike our current model, there is a registration fee. When a member wants to buy, he goes to a listed name in the appropriate category and gets what he wants, without paying cash. The trade limit on his card will be reduced accordingly. Once he exhausts the limit, he can’t buy anymore, unless he offers his goods and services in return.
But, apart from the plastic, how is this any different from what you are already doing?
Since the system is automated, neither the buyer nor seller has to approach us while transacting. The deal is simply recorded on a voucher. Or it can be tracked on IPoS (Internet point of sale), an easy-to-use Web application, in which the card number of both the buyer and the seller are posted, along with the deal value. While this means neither party has to interact with us, we will also have a call centre to facilitate transactions. The net effect is that the whole system will work in much the same way as a credit card does and this will drive membership.
Aren’t you going for swipe cards?
No, we can’t really, because we will not be tapping small- and mid-sized businesses, but very small enterprises and individual professionals, too. And the swipe mechanism is pretty expensive. In any case, given the Internet penetration in the country, IPoS seems to offer a very good solution across the board.
Is the mechanism fail-safe?
Well, it is better than the one we are currently using. Our registration procedure will have to be more stringent. For instance, we will also be asking the small guy for a personal guarantee.
How many members are you targeting?
I can’t disclose that now, but it will be several times the number we have already. And, the number of merchandise and service categories will also expand exponentially.
We expect the small guy to come to us because nobody else is servicing him today. In fact, that’s why even the foreign players are eyeing this market.
Manoj Bhatia, 42, a West Delhi-based businessman, runs an office that sells a wide range of home appliances such as water purifiers, reverse osmosis systems, electric chimneys and gas geysers.
Manoj Bhatia
His need
• Regularly advertises in both the vernacular and the English media to generate sales.
• Spends around Rs20-25 lakh a year on publicity, most of it between March and November.
• Ad expenses peak during Diwali.
The problem
• Says Rs25 lakh is a lot of cash to invest for a business his size.
• No newspaper would give him credit.
The solution
• Bhatia simply calls up a trade exchange he is registered with and asks them to source ads for him.
• When ads are placed, he doesn’t pay the newspaper.
• His barter account with the exchange sees an entry of trade debits equivalent to the value of the ads he has placed (1 trade debit = Re1).
• Pays up to 10% of the value of the ads to the trade exchange.
• Later, when another member of the exchange needs his wares, he sells his merchandise and gets trade credits in his barter account.
• Trade credits are set off against his trade debits, which means his liability for the ads is reduced by the value of his sales via the exchange.
• Does not pay any fee to trade exchange for facilitating sale.
Benefits of swapping
• Bhatia says that his principal aim is to conserve cash. He claims that the three-way barter has been helping him achieve this.
• Is able to push sales to regular customers at one-tenth of the cost he would have typically incurred in cash.
• Is able to tap new customers—and new markets—without investing in test marketing and promotions.
Are all deals at MRP?
Most deals are, as the mindset is, “I don’t mind buying at MRP if I can also get something at MRP”.
Is there scope for negotiating non-MRP prices?
There is. But it is in the buyer’s interest to inform the exchange, as his debit points— and therefore, his liability to pay by selling his own services and the fee he pays to the exchange—will be reduced to that extent.
Will anybody buy on barter at MRP?
He is likely to, as he will have to pay only 10% of the value of the merchandise/service. Of course, there will be negotiations on bulk deals.
Why do companies barter?
To avoid dipping into cash reserves.
To expand current markets.
To explore new geographies.
To get rid of slow stock.
To reward star employees with gifts and holidays without using cash.
Trax Barter of Chennai also facilitates getting companies in a financial crunch to settle their dues using the three-way barter model.
What is a revolving barter limit?
If you have a barter limit of, say, Rs10 lakh, the difference between the value of your sales and the value of your purchases on the exchange cannot exceed that amount at any point of time.
Dos and Don’ts of swapping
Ask the trade exchange for a list of its larger members (big companies) before signing up. You might not want to register if some of them are already your customers and usually pay you by cheque/cash.
Offer a proper mix of slow- and fast-moving inventory in exchange. No takers for slow stocks means you will end up paying in cash for your purchases; too many takers for quick stocks may affect your liquidity.
When it comes to paperwork, treat your barters as you would your cash deals. Apart from helping you with tax matters, this will help when you’re buying at a discounted price.
Never think of barter as a tax saver, if you are offering goods and services related to your business. The taxman will treat the transaction as commercial and tax accordingly.
Never offer more than 10% of the value of your total inventory in exchange. You could run into a liquidity problem.
Write to us at businessoflife@livemint.com
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First Published: Mon, Aug 27 2007. 12 35 AM IST