If you’ve recently started a new business or are thinking about starting one, then you might be aware of the cash flow challenges that await you. However, consider a strategy that both startups and established businesses have used since commerce began that can help you preserve precious cash while still obtaining the goods and services you need to run your business: barter.
Barter is the exchange of goods or services between businesses or individuals. It can be especially beneficial for small and startup companies, because it allows each party to get what it needs by providing a product or service to the other party instead of laying out cash.
For example, consider a small Web site development firm with five employees. It wants to grow by gaining market share, but it can’t afford to pay for professional advertising or marketing services. If it could find an ad agency in need of Web site development, the firms could trade services with each other, each obtaining a valuable service it needs without having to spend money to get it.
Bartering can work just as well for manufacturers and retailers that have excess or outdated inventory that won’t move, which they can exchange with other businesses for needed goods or services. This allows companies to get some value out of inventory that they may otherwise have to mark down substantially or simply write off as a loss.
One of the best ways to engage in barter is to join a barter exchange group. These consist of other businesses also looking for suitable barter partners. They work in two primary ways:
- Companies look for other businesses in the network that have goods or services they can use and negotiate trades directly with them.
- Companies sell their goods or services to other businesses in the network and receive trade credits (or barter “dollars”) in exchange, which they can use to buy goods and services from other member businesses.
With the first option, the keys to a successful transaction are making sure that both parties find value in each other’s goods or services and attaching the proper value to the products or services being traded. This value may be in time if one of the companies is a service business, or money if goods are being exchanged. Service businesses can barter for goods and manufacturers can barter for services, providing flexibility that can make it easier to find the right barter partner.
The second option allows even more flexibility, as finding a direct trading partner isn’t even necessary. Instead, a business simply accumulates barter dollars that can be spent on products or services offered by other companies in the network. Most barter networks charge a commission on all sales and trades that take place between members.
One of the most important considerations about barter is that the IRS deems barter transactions to be taxable events. The fair market value of products or services you receive via barter must be reported as income to the IRS. This may result in income, self-employment, or excise tax liability, as well as capital gains or losses. If you make transactions via a barter exchange, you should receive a Form 1099-B from the exchange that details your barter activity.
If you barter informally with colleagues or business associates, you should put the agreement in writing, clarifying exactly what products or services are being exchanged and their dollar value, and report this on your business tax return.
To learn more about barter and get help in locating potential barter partners and networks, contact the International Reciprocal Trade Association.