What is barter?
In its most basic definition, bartering is the trading of goods and/or services for those of another. But in a day and age of cash, credit cards, and gift cards, why try to conduct a transaction that doesn’t involve some form of liquid currency?
The primary reason companies barter is because they save cash which improves their profit margins. Companies can leverage the cost of what they produce to obtain items they want and/or need without paying normal cash prices. The savings they realize (regular cash prices minus their cost of goods/services delivered) equals extra profit.
How do you start bartering?
When it comes to business-to-business (B2B) barter and trading, the positives make bartering worthwhile, but what are the specifics of how it works?
There are 2 primary means of conducting business barter transactions, and they both have their pros and cons. The First method is the original 1-to-1 barter arrangement; the second is by using organized barter exchanges.
1-to-1 Bartering
1- to-1 barter is simple; it involves just two parties that have a reciprocal interest in what each other provides. My earlier example of the orthodontist and the restaurant owner is a perfect example of a 1-to-1 barter transaction. All this method takes is finding a willing partner and coming to a handshake agreement on what each of you is willing to exchange.
Here are the positive points of a direct 1-to-1 barter transaction.
Cost-Effective – Bartering in this way is the most effective in terms of cost because there are generally no fees or middlemen involved in the process.
Higher level of trust between known parties – These types of transactions generally occur between people who know each other, so there is a higher level of trust involved.
Taxation –Taxation rules set by governing bodies and managed/enforced by the IRS state that all revenues earned by a business, either in currency OR in non-currency physical assets and/or services, are considered taxable income. In reality, small 1-to-1 barter transactions between people that know each other rarely make it onto any form of accounting books, so people conduct this activity “under the table,” so to speak. For those transactions that escape the attention of the IRS, bartering partners get the benefit of barter transactions minus tax implications. But I can’t stress enough this activity is in direct violation of IRS regulations, and there are plenty of examples where people thought they were conducting “harmless” barter transactions, which caught the attention of the IRS, and audits/penalties ensued.
What to look out for with 1-to-1 barter deals
In contrast, here are some of the negatives of a 1-to-1 barter transaction to be on the lookout for:
Locating and developing 1-to-1 trading relationships with trading partners that have something you want AND have a need for what you provide can turn into an extremely high cost in terms of time and effort. Not many of us have a ton of spare time in this modern era to devote to this effort. Yes, you can just limit bartering to people you already have relationships with, but there is no guarantee that they want what you have, and you’ll be limited in options of what you can get because of a limited network.
Issues with equality of value for goods/services being traded. It is generally possible to find someone with something you want who likely wants something you have back; however, the cost differences create difficulty in finalizing a trade. For example, a roofing company may like the idea of using gift baskets as presents for its customers. But is it fair for that roofing company to trade a roof replacement worth $20,000 to the owner of the gift basket company? Likely not. The disparity in values of the traded goods would likely end this barter arrangement before it gets done.
Quality of work/service/product can be suspect. This is especially true if you don’t know the person well whom you’re trading with. There’s a lot of trust that is required in 1-to-1 bartering, and unfortunately, not everybody out there is as trustworthy as you are. There can even be times when you DO trust the person you’re dealing with, but they’re just not very good at what they do even though they think they are.
No recourse or assurances when anything goes wrong. Building on point #3, if you move forward with a barter deal and you provide what you promised, what happens if they don’t? Unless you’re willing to take expensive legal action, nothing. The same goes if they do deliver, but it’s subpar or not what you were expecting. You have little to no options other than to eat the loss.
Organized Barter Exchanges
Many business owners obtain the benefits of bartering through the use of organized barter exchanges.
Organized barter exchanges came into existence about 75 years ago and have continued to gain in size and popularity ever since. Organized Barter exchanges are generally closed membership groups with thousands of companies as members and the bartering takes place only between the members themselves.
Here are some of the key differences between barter exchanges and 1-to-1 barter transactions:
- Barter exchanges are only for members. Companies only have to join once and there is usually a one-time enrollment fee, but once joined, companies have full access to doing business with the thousands of other companies in the exchange.
- Barter arrangements in the exchange are multi-directional – You can obtain goods from one company without them needing to get something from you directly. For example, the gift basket company can get a roof replacement from the previously mentioned roofing company and the roofing company does not have to get $20,000 of gift baskets. They can use their $20,000 in trade “credits” with another company like a law firm or an IT managed services company.
- Barter exchanges use an alternative currency inside the closed system – this currency is only available to members that join the exchange (and it must be earned by the members). This alternative currency is what allows barter deals to be multi-directional and it enables deals of unequal value to take place when they normally wouldn’t…it lubricates the whole transaction process.
What are the negatives of joining a large, organized barter exchange?
Costs and Fees – There is a cost associated with joining AND with transactions; Companies generally pay a one-time enrollment fee of anywhere between $100-1,000 to gain admittance to the exchange. How the barter exchanges actually make their money is through transaction charges–generally 10-15% per full transaction.
Taxable Revenues – Revenues generated via barter and trade business will be reported and are considered taxable income.
The Barter exchange is not your local Walmart – as big as some of these exchanges can be, there will inevitably be times when you cannot find a product/service you want. If you’re inflexible in how you use your trade currency, exchanges can be frustrating at times.
Positives of Organized Barter
While the extra costs of organized barter may not appeal to some, there’s a reason why so many companies are willing to pay them. In most cases, the positives of participating in Organized Barter Exchanges far outweigh some of the higher costs. Here’s a listing of the most prevalent reasons:
Little or no effort is needed to find trading partners – There are usually thousands of members and a much wider array of options compared to what you can find in your own personal network if you just want to take a look yourself.
New Business Customers – Good quality exchanges will send you new business with zero effort on your part; this is new business you would not have gotten outside of the exchange.
Members are generally vetted for quality – As long as you join a reputable exchange, you can have high confidence that members will consistently provide good quality products and services.
3rd party oversight and services – The leadership of the exchange wants barter deals to happen frequently and with confidence, so they generally do everything they can to help make sure deals happen in a fair and consistent manner between members.If anything goes wrong with a transaction, there is some limited recourse available to help achieve a resolution with the other party involved.Taxation – everything is properly accounted for and reported to all parties involved which protect companies using heavy amounts of barter from negative tax reporting issues. Just give the reports to your accountant and you are good to go.
Immediate marketing benefits – Companies joining large exchanges get instantaneous added brand awareness along with multiple opportunities to increase market share via new channels not available outside of the exchanges.
Cash business referrals increase – Exchange members want everybody in the exchange to do well; they tend to spread the word of mouth better than your best customers.
Aid with collecting bad debts from cash customers – have a cash customer that’s struggling to pay what they owe, but they have nothing you need/want? Invite them to join your barter exchange and you can use the multi-directional bartering to collect your debts in trade revenues instead.
In a Nutshell
If you are a business owner that wants to grow their business, and you have any extra capacity or inventory that is not currently earning you cash revenues (think the spare time that can be used towards working on another project, empty tables at a restaurant, or idle inventory taking up shelf space), then barter is an extremely effective tool to help you reduce expenses and increase cash profits. The question is how do you most efficiently take advantage of barter. 1-to-1 bartering is most efficient when you have partners you trust and are readily available and interested in trading. If you don’t have easy access to those partners, organized barter exchanges might be a better option for you. Organized barter exchanges also have the added benefits of increased brand awareness and larger marketing channels for new customer acquisition. Either route you choose, getting into the habit of turning barter into an everyday part of your business operations will be invaluable as we move forward in an economy with many questions and concerns over its stability for the upcoming years.
