Financial Times reported that Iran and China were working on an oil barter deal. The Wall Street Journal ran an article on restaurants accepting and using barter credits in their businesses. Fox Business ran an article on health care options being offered on barter exchanges. Entrepreneur Magazine published an article on barter helping to reduce entrepreneurial start-up costs. Now, if major news and information resources such as these are covering a topic, and entire countries are trying out a particular system of commerce, then it just might be worth looking into for your small business.
What Is Bartering?
Barter is simply the trading of goods or services for other goods or services with no cash involvement. There is no set pattern or rule as to what can be traded for what, aside from those goods and services which are deemed illegal. To promote bartering, and make it easier for companies to interact, barter exchanges and barter markets were established. These systems enable bartering to be taken to a new level by offering “barter credits” which are used like cash within that specific network. When you “sell” something you get paid in barter credits which you can then use to “pay” for something from another vendor if necessary or bank until needed at a future time.
How You Can Benefit From Bartering
- The fact that there is no cash involvement, any business can participate in a trade. This is especially helpful to small and newer businesses where cash-flow tends to be a big concern.
- Any combination of things can be traded: accounting services for web design; printing services for cleaning services or repairs; advertising for legal services. There is no limit to what you can trade for.
- The accounting and tax treatments are exactly the same as if you were using cash: all sales are taxable income and the same rules apply for deducting expenses.
- Without the need for access to large amounts of capital or credit, your business may be able to develop and grow more quickly.
- There are people in all sorts of business looking to trade a variety of goods and services, so your options are not limited.
- A way to reach a potentially untapped source of customers and generate word of mouth publicity that can spread to cash customers in the future.
- Barter transactions may lead to future cash transactions, or may be used to entice customers into cash transactions.
- You would conserve your cash for use on expansion such as hiring employees (which can be done on barter too within a barter network), or use on expenses that cannot be bartered for such as utilities, licensing, and taxes.
- It provides a way to sell off excess or slow-moving inventory when traditional payment methods have failed
As mentioned earlier, there are barter networks or barter exchanges which use their own “currency” to facilitate commerce. For each transaction you make, you would get barter “credits” which you can then bank and use at a later time on any other products or services. These networks make barter more accessible as you wouldn’t have to find a trade partner directly, which will help expand your business. For example:
If you are a web designer you can design a site for an architect and get paid in barter credit. You may not have any use for an architect’s services, but rather have a need for business cards. You can then take your barter credits and hire a printer within the network to make your cards and pay them with the credits you earned from doing work for the architect. Or, you can just keep those credits in your account until the time comes when you need something from anyone else within the network.
In the traditional barter system, you would be forced to search for a trade partner who has what you need and needs what you provide. This method is easier than direct trade, since you can acquire new customers who might not have anything you need in return. These networks generally charge a monthly fee, plus commissions per transactions to support the network. Companies like Itex, a publicly traded barter network, use those fees to support their communities by hosting websites that provide classified ads, member directories and profiles, account information, and other benefits which vary based on the different networks. Plus with barter networks, the worries of collecting receivables is greatly reduced. Many of the networks give you online transaction-processing built-in.
Since barter transactions are widely considered to be treated in the same manner as cash transactions (check your state’s revenue division for specific rules where you are), there is no learning curve, no specialized software to learn, and no downtime. You record your transactions the same way you would as cash in your accounting software and there is no learning curve, so you can essentially hit the ground running.
So, is bartering for you? Have you ever tried bartering before? If you have will you use it again?