Finance From A-Z: Barter System

Term: Barter System

Definition: An organized method of trade whereby participants exchange goods or services instead of money

What does this mean to me?:
Bartering has been in existence as a method of exchange longer than “money”. Although bartering is more of an economic term it still has relevance for business and finance.

Often during start-up entrepreneurs struggle with sources of money. If they would stop and consider all available resources they actually have lots of value stored up in bartering. Using a barter system can be an ideal method to quickly accrue resources, especially when initial cash is limited.

Case Study:
In 2005 I had a client (we’ll call him Sam) that once exchanged services for a brand new MacBook Pro Laptop. Sam was in desperate need of a computer upgrade in order to improve customer service and responsiveness. Normally, Sam’s revenue price point didn’t allow him to generate the $3,000+ he needed to purchase the laptop. Also as a new business he wasn’t able to obtain vendor credit. It would have taken him several months in order to make enough sales to raise that much excess cash.

However, Sam had a high-end client (we’ll call him Dave) that needed specialized expertise in web-design and Trans-media development. Normally, Sam charges a reoccurring monthly fee which is standard for his type of service but, by bartering he received the value in a lump sum.

Also, Dave had vendor credit and didn’t use all his available cash. So, Dave purchased the Laptop on credit and gave it to Sam as payment – resulting, in bartered services for a New Laptop.

The message here is – when looking for resources consider bartering as an alternative. There are networks for bartering that you can research. Just Google Bartering Networks and check out the options. Click on this link to get you started.

– Manch Kersee
J.R. Dexter, Inc. “Business Decision Support”

Finance From A-Z: Amortization Period

Term: Amortization Period

Definition:
The period or length of time over which the principal portion of a loan is scheduled to be paid down through periodic payments.

What does this mean to you:

The amortization period you select has a significant impact on cash-flow so a conscious decision should be made on which period you select.

When you decide on an amortization period there is an inverse relation between cash-flow and capital savings. Meaning, a longer period has less annual cash outlay but, you spend more in interest because of the longer period of time – which means your company has less savings due to higher interest expense.

If you chose a shorter period the reverse is true. Annual cash-outflow is higher but you pay less is in expenses overtime which means more profit can be retained in the long run.

Example:
A $50,000; 15 year business loan at 8% has an annual payment of -$5,841.48. Over the life of the loan you will pay -$87,622. That’s -$37,622 in interest.

If you reduce your amortization period by five years to a 10 year Amortization Period, the annual pay-out is now -$7,451.47. Over the life of the loan you pay -$74,514.74. That’s a savings of $13,100 in interest with a trade-off of an annual increased cash outflow of -$1,609.90.

Ultimately, the decision on which Amortization Period you select is based on your company’s credit score, available cash-flow and your long-term financing strategy. So, don’t just take the first amortization period offered to you by your lender. You should analyze your options. Also, remember to negotiate a lower interest rate along with a shorter amortization period. The risk period is less for the lender so you should reap some of the benefits too.

Click on this link to see a quick loan calculator that will let you do some What-if scenarios to determine the interest and payment schedules

JR Dexter, Inc – “Business Decision Support”.
“Better Financial Decisions through Intuitive Analytics”