CREDIT MANAGEMENT WITH BARTER

CREDIT MANAGEMENT WITH BARTER
Author: Neha Gupta, Writer for Ormita Australia Limited
Date Issued: February 2010

Giving and receiving credit is a part and parcel of everyday business and is part of creating a level of understanding and trust between businesses that is needed in order to co-exist and grow but giving credit is also risky. Even when legal contracts are signed there are no guarantees that you will get your money back, or, if you do get it back, that you will do so without any unnecessary hassles.

Imagine you give someone a supply of your goods on credit for five years. During those five years it will be like putting that money in a locker where you can neither use it nor get profit from it. Also, if you are the one taking credit, you will be risking not just your money but someone else’s money as well. There are, however, some creative solutions to the issue of credit loans and repayment.

Taking product in lieu of cash: To recover debt you can offer to take the goods and services of your debtor in place of the cash. This way they sell their unused inventory and you can either use these goods directly or barter them. By taking a product in lieu of cash from a cash-poor or bankrupt customer, one can virtually eliminate a business loss that would otherwise be unavoidable.

Indirect barter: You can encourage businesses who owe you a debt to use barter if they are not able to pay in cash.

By encouraging a debtor to join a barter network which will sell their product and give you barter ‘credits’ which you can spend on a greater range of essentials.

This way, the debtor businesses can use their underdeveloped or unused resources to pay your debt without sacrificing additional cash. Additionally they may also get more cash customers at a later stage as there are more users of their product or service in the market.

By using barter to manage and recover credit you can yield many benefits.

Get paid now: Using barter you get paid for your services or product now instead of in the late future or in some cases never. Barter helps fix the problem of overdue cash. Imagine you own a banquet hall which you lent to a couple for their wedding. They paid half the rent in advance and the other half is still pending say after two years. Wouldn’t it be more beneficial for you if you can find something that they have that you can trade in place of the cash that is long overdue? For example, one of the partners may be an accountant or have other skills that you can use in your business. By thinking creatively you not only benefit yourself but others as well. You receive products and services you need in return for hard-to-collect debts. In some cases you might now be able to directly use the product or service that the people who owe you a debt can provide but you can always barter these products with others to get what you actually need. Being a part of a barter network will come in handy. Hence, barter also helps maximize the value of what is returned.

Minimize your risk: Using barter you minimize the risks involved in giving credit. This helps you reduce the chances of a long-term debt being uncollectible. In such a case, you collect products and services in place of cash. Also, by doing barter on debts people owe you, you ensure that you receive something of value today instead of little to no cash much later in the future. The chance of a debtor repaying decreases with time in most cases. If their business is not doing well today it might get worse in future if they don’t implement new strategies and in many cases this may call for more investment. Hence, more debts. Barter saves you the tension that debtor will never pay.

Reduces Your Costs: Collecting a bad debt is not just stressful. But it can also be very expensive and time consuming. First there would be the costs of visits and phone calls you make to get back the money people owe you. Then, imagine the cost of hiring lawyers in case of legal issues and then the collection costs. So, by using barter you save yourself a lot of money which would have otherwise been spent on collection costs and legal fees. You also save yourself time. They say, ‘time once lost can never be recovered’. So, saving your precious time is an added advantage. Also, while you have lent money to others you might need money yourself. So, this saves you the need to borrow money to cover short term costs.

Barter offers people the opportunity to trade bad debts for products or services which are need to reduce their current costs. This helps to eliminate the problems of overdue cash, costly collection fees, interest charges and risky debtors.