Barter can be good for business, but act with care

Barter, by definition, is the exchange of goods and services for other goods and services. The barter system was one of the earliest forms of trading, pre-dating money. Evidence exists in the historical record that traces bartering back to the ancient tribes of Mesopotamia circa 6,000 BC. The system has grown and flourished through the centuries, evolving from bi-lateral trades for everyday necessities to the sophisticated, global exchanges in use by businesses today.

While one-to-one bartering is practiced between individuals and businesses on an informal basis, organized barter exchanges have developed to conduct third-party bartering. Modern exchanges have addressed the inherent limitations of early localized systems, such as:

The absence of a common measure of value.

The indivisibility of certain goods.

A uniform means of quantifying the value of goods and services.

The need for a presence of double coincidence of wants.

A barter exchange operates as a broker and bank in which each participating member has an account that is debited when purchases are made and credited when sales are made. The first of these organized services was established in the 1930s during the Great Depression, when times were tough and money was scarce. Monetary crises continue to drive the growth and popularity of this form of commerce as a complement to monetary transactions.

Whether you are starting or growing a business, there are many benefits of bartering, the most obvious of which is preserving working capital, but you also need to be aware of the potential pitfalls.

Barter can benefit your business by:

Facilitating the acquisition of big-ticket items or on-going business needs without large outlays of cash.

Generating sales and profits by broadening your customer base through trades and referrals.

Moving of surplus stock.

Eliminating the need for additional advertising and deep discounts.

Non-cash trade transactions used to be a popular means of tax avoidance, but the IRS now requires that all trades be reported as taxable revenue on a 1099-B Form. According to the Tax Equity and Fiscal Responsibility Act of 1982, “The fair market value of goods and services exchanged must be included in the income of both parties.” Barter dollars are identical to real dollars at income tax time, so owners should treat barter revenue and expense like any of their other business activities. Businesses should keep good records, and work with a reputable barter exchange. And don’t worry — utilizing a barter exchange does not put you at any greater risk for an IRS review or audit than the rest of your business does.

A legitimate barter exchange will do most of the recordkeeping for you, in addition to preparing and filing all required 1099-B Forms. Other perks of a good exchange may include:

Listings in online and other directories.

Member recognition through barter newsletters, catalogs and product expositions.

Fellow network-member referrals.

Before selecting an exchange, contact an industry trade association such as International Reciprocal Trade Association (www.irta.com) for a list of member groups. Then, do your due diligence. The following should help in the selection process:

Contact colleagues and clients for references, and check with the Better Business Bureau or the Chamber of Commerce for satisfaction ratings or complaints.

Make a list of products you need but are unable or unwilling to purchase with cash. Make sure these items are available through the prospective exchange.

Keep in mind that larger exchanges can provide better opportunities to make appropriate trades.

Evaluate membership dues and other fees. You may be expected to pay a one-time fee to enroll, annual membership dues, a percentage of each transaction, or a combination of these fees.

Your business may be located in an area where there are only one or two services. That doesn’t mean you need to limit your trade capacity to only local businesses. Consider joining the local exchange and an online association that will enable you to cast a wider net for your business needs.

While bartering can be a boon for companies on tight operational budgets, problems can always arise. Here are a few precautions you should take to help protect your interests:

Document all agreements and procedures.

Train staff on trading procedures, which do not include standard invoices.

Record any conditions or restrictions prior to signing an agreement.

Offer a product or service at advertised retail value. Do not over-inflate. By the same token, remember that the purchases you make via the barter exchange will be paid at the retail rate. Discounts are seldom available in the trade environment.

Don’t undermine trades with junk or rejects. If you’re offering anything other than top-quality goods or services, you must disclose that fact.

Try to use credits in a timely manner. Barter exchange membership can turn over quickly – don’t risk losing access to a particular service you want.

Re-evaluate memberships annually to ensure continued benefits. Compare groups to examine benefits and membership costs, and to obtain member references.

Always be sure a trade arrangement is in the best interest of your business.

An unintended consequence may prove to be a boon to the barter industry. Barter complements the environmental movement that has gained traction in the last several decades. The expenditure of resources involved in the manufacture and distribution of new products is concurrently reduced by trading existing products. A global market for barter mitigates waste and acts as a counterpoint to the disposable economy. Consumer and small business websites such as Tradepal, This4that.biz, BarterQuest.com and BarterForce.com promote bartering as a green alternative to buying and selling.

By observing a few rules, doing some homework and applying a good measure of common sense, most business can reap the rewards of bartering. A better cash flow, new business, and a fresh marketing path are within easy grasp. You can even pat yourself on the back for helping the environment.

Teresa Martin is the principal of The Profitability Solution LLC in Reno. Contact her at Teresa@tp-s.com or 775-825-1568.