Starting a new business requires investment of money, time and expertise. During the initial setup a lot of capital is required. In some cases, entrepreneurs may seek outside investment to get the necessary capital to get there business off ground. Attaining cash investors is not an easy task. It is a risky proposition to invest in a new business and hence it’s difficult to convince people that your business is worth the risk. So, why not barter shares of your business for the goods and services that you require in place of cash investment? People who are skeptical in investing cash in your business might not be so while investing in kind.
They gain a customer: when someone trades their products and services for equity in your business, they gain you as a customer. You might not be a cash paying customer right now but you are helping them build their asset base and sell their inventory. Also, as your business becomes profitable they will be able to gain profit in terms of cash too. There is also the possibility that in future you might become a cash paying customer.
They gain an asset: When these businesses invest in kind in your business, they use their products and services to increase their asset base. If they would have sold their products in the market to a cash paying customer and then would have invested in a business it would have meant the same. However, now they are investing in a business whose growth will directly effect their business growth as you use their products in your business.
Mutual benefits: There are other benefits too. Like they can use your business for advertising their enterprise and they can advertise you in turn. They can use your services or products and you give them a better deal than available in market as they are your benefactor. For example, you own a beauty salon and enter a barter trade with a cosmetic company. They supplied your business with necessary products in exchange for an equity share in it. Now, you are advertising their products to your customers. You also sell their products in your location and if their clients or associates use your salon you give them an additional discount. Hence, it is a good investment for them.
First and foremost it’s easier to gain investment in terms of products and services than in terms of cash. As mentioned earlier investing in a business involves risk and risking hard cash is more difficult than risking products and services. This has as much to do with human psychology as economics.
The Times of India provides advertising to up and coming businesses in return for equity shares in these businesses. The Bennett and Coleman group that owns this paper is one of the biggest media giants. They have experience in business they can share with others if they are a part of their network. Similarly, when you seek outside investment you gain not just from the investors’ products and services but also from their experience and their market standing.
Being an investment to an established business helps you increase your customer base. This is because these businesses have interest in your growth. They will refer their customers to you. They will help you establish market value and you can use their contacts for improving your business.
Also, some businesses want to invest in other businesses but for them cash investment is difficult as they do not have the necessary cash accumulated for major investment. Hence, you give such businesses a chance by taking investment in terms of products. As products are more readily available than cash.
When seeking finance you should remember that barter via the World Trade Exchange Commerce Network is the most effective way of equity financing.