Cashing in on inventories: through barter trading, companies can restore the value of overstocked goods and services.

What does a company do when it finds that it has produced more than the market wants and it is stuck with the excess?

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What do companies do when they run short of cash but they have plenty of products and services to offer?

Well, they trade their inventories for the cash they need. And there are businesses out there dedicated to helping firms do just that. It's called bartering.

Not many companies in Mexico know how this tool works. As a result, they could be missing out on a valuable financial tool for increasing sales, collecting debts and shopping for all kinds of products and services.

Wagner & Company, a Mexican distributor of hardware goods and bathroom fixtures; knows the benefits of barter trading well. Daniel Rocha, general director of the company, said the firm has used the financial tool for more than three years, in most cases to buy advertising.

But fresh money is not the only benefit of the service. According to Rocha, the service gives his firm another competitive edge: Argent Trading, the bartering company he works with, also introduces him to new customers that he otherwise would not meet. "They send people to me and I accept them," he said.

There are two main types of barter companies: those that act as intermediaries between buyer and seller and those that purchase the goods outright with a combination of cash and trading credits.

BarterTrust specializes in facilitating the exchange of goods and services between parties. Since you don't necessarily want to buy the goods on offer from the person you are selling to, you negotiate what Barter Trust calls "barter pesos"--credits you can use to purchase what you need from a third company.

Ricardo Kahwagi, director of Barter Trust in Mexico, explained transactions range in size from theater tickets worth a few hundred pesos to industrial equipment worth more than a million dollars. He said that on average, most trades are for values of about US$1,000.

In the U.S., that average is closer to US$100 because about 90 percent of the operations are handled through the Internet. But here in Mexico, many participants don't use the Internet or do not trust it, so transaction costs are still much higher. The result is that Barter Trust's commission remains high, at 9.8 percent of the transaction value. Kahwagi hopes that will change as more clients use the web.

Some of the firm's 1,800 clients trade one or more times a month, while others only enter the market once or twice a year. He said BarterTrust averages about 450 operations per month.

Transactions are made entirely in "barter pesos," which are worth one peso each. Only the 15 percent value-added tax (IVA) and BarterTrust's commission involve cash.

Since invoicing is the same, barter pesos are equal to the national currency, and since the IVA is paid in cash, there is no problem reporting barter sales to Mexico's tax authorities.

Kahwagi said he receives only cash for the commission to avoid any possibility of a conflict of interest. "In that way I'm not playing in the trade," he said. "If I became a player in the trade, I'd be a player and a judge."

The company started out in 1996 by recruiting 10 participants and the business reached a critical mass less than two years later, when it had about 350 traders.

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Argent Trading operates on a different basis from BarterTrust. Its non-cash credits are called Asset Purchase Credits, or APCs. And the company actively participates in the market by purchasing goods directly from clients and paying with a mixture of cash and credits. It takes on the risk that it can sell the goods elsewhere.

This type of transaction is geared more toward larger firms such as manufacturers. A typical case might be someone who has been unable to sell its production of seasonal items--say, Christmas toys or textiles--, but the company will also buy a large non-performing asset such as an airplane or building.

As Rafael Corral, managing director of Argent Trading Mexico, put it, "What we specialize in is restoring value."

With clients in Mexico like IBM, Nestle, Ford, Herdez, Vitro, Cemex, Electrolux, Grupo Posadas, Gillete, Colgate-Palmolive and Sony, seasonal items make up a large part of the firm's purchases.

"If you haven't sold sweaters in January, nobody is going to buy a sweater in Mexico," said Corral. "It's a lot of seasonal risk, especially in clothing. We have clients in textiles that at the end of every season give us their inventory. Next winter is going to be different designs and fashions."

Because Argent Trading is part of a worldwide trading network with head office in New York and operations in 14 countries, it often sells surplus inventories in other countries.

"If we buy sweaters in Mexico in January, that's when they are starting to buy this type of goods in Argentina," said Corral. "We have an office in Brazil, (and) a lot of contacts in Argentina, Chile and Peru."

Argent's international reach enables it to negotiate restrictions on re-selling the distressed inventories it buys.

"When we buy inventory, we always discuss restrictions with our clients," Corral said. "We don't want to be competition to our clients ... If we buy in Spain we cannot sell in Spain, so what we do is to take that inventory and sell it in some other place."

What do clients do with their credits? Argent has a group of approved vendors with whom its clients can negotiate partial payment for goods and services in APCs.

These vendors are selected because they sell the types of goods and services most large companies need. Media advertising is one of the biggest items. Others include travel services, insurance, packaging, uniforms and raw materials.

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Juan Carlos Aziz is manager at Amersport Mexico, which handles name brand sporting goods, including Wilson's. He has used Argent Trading's services on three different occasions to liquidate slow-moving inventory. Aziz was able to use his credits for media advertising and as partial payment for renting his office space and distribution center.

That highlights another facet of the barter business: clients are encouraged to be creative in finding new ways to use their credits. Both Corral and Kahwagi say some of their clients have used their credits to purchase property, and BarterTrust will even give new Clients a line of credit to get started.

"We are very flexible," said Corral. "In many cases it is our client that tells us what he wants to do. We don't know the possibilities that the client has for credits."

Both companies stress customer service as a critical factor in making the barter system work. Corral says most of his company's 23 employees spend their time on customer service--evaluating inventories, managing their credit balances and introducing them to vendors who accept APCs.

At BarterTrust, all but four of 55 employees work directly with customers. They help them sell their goods, match their needs with the products and services offered by other clients, manage their barter peso accounts, and when necessary, mediate disputes.

BarterTrust and Argent Trading both got their start in Mexico during the mid-1990s, when cash was in short supply, interest rates were high and there was a powerful incentive to do business outside of the cash market. Yet both remain confident that there is lots of room for growth in the years ahead.

"It's a good option for any company," said Kahwagi. "Companies just have to learn how to use it."