Business-to-Business Barter: I'll Swap You This For That
If your business is low on cash – or if you simply want to hold on to more cash to improve cash flow – bartering for the goods and services you normally receive makes sense. It's a simple concept: you provide a product or service in return for products and services of equal value. Neither business uses valuable cash.
While online bartering tools and websites make the process easier most small businesses barter locally.That way your company establishes on-going relationships with local businesses, and also tests the quality of what you receive ahead of time.
Here are some simple-to-follow bartering guidelines:
Get agreements in writing. Bartering is still business as usual. Misunderstandings and disagreements occur, so put your agreement in writing. Spell out what will be provided and received, timetables, quality standards and clearly establish your company's expectations.
Keep your standards high. Don't barter with any company with whom you would not otherwise establish a business relationship. Convenience and cash flow concerns are important, but if the other party doesn't perform to your satisfaction, barter can be a bad deal.
Set deadlines and stay on track. Say you barter services with another firm. You shouldn’t complete your end of the barter if the other party has only provided 25% of deliverables. You'll have limited recourse if the other party doesn't perform, so keep things "even" as you move through the transaction.
Negotiate to receive equal value. While bartering may save you money, especially if you have open capacity that would otherwise sit idle, don't give away the store. Establish a fair value for what you provide and make sure you receive equal value in return. That can be especially tricky if you plan to barter services in exchange for products, so do your homework and establish a win-win agreement for both parties.
Establish an "out" clause. What happens if the other party doesn't perform? What happens if you decide the bartering relationship no longer makes sense? Put in writing how the agreement will be terminated: when, how and whether advance notice is required.
You can also set up bartering relationships online. A number of "barter exchanges" help bring businesses together. To find a barter exchange, simply search using the term "barter exchange," or check with the National Association of Trade Exchanges (www.natebarter.com) or the International Reciprocal Trade Association (www.irta.com).
On-line bartering is fairly simple. In most cases, a business registers on the barter site and then posts an item or service for exchange. Interested parties indicate they would like to barter for that item or service. Purchasers use "credits" to buy the product and those credits are given to the selling party.
Then the seller can use those credits to buy other products and services, continuing the barter cycle. Of course, the barter exchange receives a fee for connecting buyers and sellers. Most exchanges charge a monthly fee, a commission based on the value of the goods and services exchanged, or both, so shop around for the best terms.
Taxes On Bartered Goods And Services
While barter transactions don't involve cash, they do have tax implications.
The IRS expects the fair market value of bartered products and services to be included as income during the tax year those products and services are received. Of course, the cost of producing goods or services you provide through a barter transaction are listed on the expense side of company returns in the tax year you incur that expense. So, in many cases the "revenue" and "cost" offset each other.
Even if they don't offset, barter reduces overall tax liability since the value of a product or service is typically lower than the amount you'd pay or receive at full markup. For example, receiving a service at cost rather than at market value lowers company "income," and, therefore, tax liability.
Even without tax benefits barter makes sense. Not only do you improve cash flow, you establish strategic relationships with other local companies. Bartering also creates an alternative way to reduce excess inventory or utilize untapped production capacity. Barter flattens peaks and valleys of seasonal businesses. You provide services through barter during slow months and receive services when your barter partner is experiencing down time.
A "great deal" is not actually a great deal if your company doesn't need the goods or services received. Under ideal conditions, bartering utilizes idle capacity, unloads excess inventory and, most importantly, frees up cash for other business purposes.
Always look for ideal bartering relationships, and make sure those relationships continue to work for you once established.
Swapping in the business realm is a winning solution when undertaken with care and eyes wide open.