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HOW CAN MY BUSINESS BENEFIT FROM BARTER?

Using barter is a great way to enhance your business. Merriam Webster defines barter as trading by exchanging one commodity for another or trading goods or services in exchange for other goods or services. Before reliable monetary systems were invented, barter was the primary means of commerce. Markets emerged out of division of labor whereby individuals specialized in specific crafts and depended on others for subsistence goods. This was hindered by the “double coincidence of wants” where each participant must want what the other has. Other limitations of barter are unequal value of goods to be exchanged, indivisibility of certain goods, lack of standards for deferred payments and difficulty in storing wealth from perishable goods. This created the origin of money as a universally desired medium of exchange to solve these issues allowing each half of the transaction to be separated. Also, the creation of third party barter exchanges helps overcome the limitations of barter. A barter exchange operates as a broker in which each participating member has an account that is debited when purchases are made and credited when sales are made. Barter can now be done directly between two participants or through third party barter exchanges. There are a number of benefits of barter such as increasing sales, conserving cash, moving inventory and making productive use of excess inventory or production. Also, barter can be used during periods of monetary crisis where currency may be in short supply, currency may be highly devalued through hyperinflation or businesses cannot afford the goods or services. Here’s how it’s done.

 

Barter can be done directly between two participants. If you want or need what another business is offering and they want or need what you’re offering, goods or services can be directly exchanged. Contact businesses that have what you want or need that might want or need what you’re offering and offer them your goods or services for theirs. If they’re interested, determine a value for each other’s goods or services and how much you wish to exchange. A contract on your contact, their contract or both can be entered into to document the transaction. If equal value cannot be determined or agreed upon, a transaction including the goods and services to be exchanged and partial cash to make up the difference can be structured to create equal value.

 

Barter can be done through third party barter exchanges. There are numerous local, national and international barter exchanges. Value Card Alliance is the biggest exchange in Phoenix and ITEX is the biggest exchange nationally. Other Phoenix exchanges include BarterWorks and Tradesource. Independent Talk 1100 KFNX is a member of all of them. Barter exchanges can be joined with no fee. They make money by charging a cash commission on each transaction, either all on the buy side, all on the sell side or a combination of both. Transaction fees typically run between 8 and 15% of the transaction value. Businesses in barter exchanges earn trade credits, instead of cash, that are deposited into their account. They have the ability to purchase goods and services from other members utilizing their trade credits. They are not obligated to purchase from those whom they sold to, and vice versa. The exchange provides record keeping, brokering expertise and monthly statements to each member. Depending on the exchange, credit worthiness of the member and volume of business transacted, a trade credit line is usually extended by the exchange to the member. Also, certain offerings are offered on a trade credit and cash basis. Depending on the exchanges’ members, most goods and services a business could want or need are available. If they’re not, you can ask the exchange to recruit a wanted business. Most exchanges send out regular emails showcasing various offerings. Just like cash transactions, barter transactions can be negotiated for a better deal, negotiating trade credit and cash portions of the transaction. The International Reciprocal Trade Association (IRTA) estimated that 400,000 participating businesses transacted $14 billion globally in 2015 and forecasted growth of 5 to 10% per year.

 

Both direct and barter exchange transactions are taxable. The fair market value of goods and services exchanged must be included in the income of both parties. Goods and services can be used for the business or personally. That would determine if the income is taxed on the business or personally.

 

Now you know the benefits of barter and how to use it. Are you using barter? Why not? Barter can increase significantly enhance your business and personal life. Let me know if I can help.

 

We write this blog to help small business owners with their dilemmas, because that is what who we are, and those are our clients.

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