Cash is king, but what do you do if your business needs something desperately and can’t afford it? Take a cue from the past and barter your way to what you need. Bartering has existed since the beginning of history, where people exchanged goods or services. "It predates the existence of money and is still used extensively today. American businesses alone barter an estimated $1 billion worth of time and products every month.
But should your business start bartering? That depends on what you’re trying to achieve.
Why Businesses Barter
There are three main reasons small businesses turn to bartering:
It's better than court. Consider bartering as a better way to collect from customers that can’t pay. Using a collection agency or suing for payment is time consuming, expensive and offers no guarantees that you’ll be paid. Rather than go through such a painful process, you can barter with the non-paying client. Take inventory, office equipment or anything you can use. If you can’t use it, sell it on eBay or Craigslist. Recouping 30 cents on the dollar without having to risk any additional money is better than spending thousands of dollars for a chance to maybe get back 50 cents on the dollar.
Use excess capacity. Many small businesses operate at a fraction of their capacities. Overall, U.S. businesses currently operate at around 79 percent capacity, leaving too much time in idle hands. The closer your business can get to operating at 100 percent capacity, the more profitable it should be under normal circumstances. Bartering is a way to use that excess capacity so it doesn’t go to waste. If you spend one-third of your time surfing the Internet due to a lack of work, then why not barter that time for something else? You won’t make as much money as if you actually sold your services for cash, but bartering is better than nothing.
Grow your new business. Many professionals like physicians, lawyers and accountants use bartering when they launch their own practices. It’s a way to capture new customers that don’t know you or may be skeptical for other reasons. By accepting barter as a method of payment, professionals achieve various goals. First it breaks down the barrier of resistance to spending money with someone you don’t know yet. It also provides an opportunity for these customers to get to know the new guy in town. This usually leads to word-of-mouth marketing and a successful practice.
If you want to start bartering but aren’t sure where to start, consider working with a bartering exchange. These organizations match buyers and sellers of anything you can imagine in barter trades. The International Reciprocal Trade Association (IRTA), ITEX and ICON International are some of the largest bartering networks with hundreds of thousands of member companies exchanging goods and services.
Engaging in bartering has tax consequences. If you receive something in a barter transaction you must include its value as revenues on business’ tax form (Schedule C or 1120s). If you fail to do so the IRS will treat it as though you are taking cash under the table to avoid reporting income. On the positive side you can also deduct the expenses related to offering something in barter. The net effect on your taxes may be small but if you don’t report it, it could result in penalties.
If instead of engaging in bartering directly with another business you participate in a bartering exchange, the transactions that take place there will be treated by the IRS like transactions to buy and sell stock through a broker. This means that you may receive a form 1099-B and have to process it accordingly.
Bartering isn't for every business, but is worth considering if you're looking to grow, need to collect on grossly overdue payments or are currently going through a slow period.
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