Barter in Small Business

Bartering is by far one of the oldest and most used types of trading dated back to the dawn of mankind.  By definition, bartering is trading or exchanging goods or services without using money.  This technique can help preserve cash to aid a start-up business or keep a small business afloat.  Today, bartering accounts for $8.25 billion a year in trade.

Advantages:

For small businesses bartering can offer a wide variety of advantages such as liquidating inventory, helping cycles of seasonality, preserving capital and buying services. If a small business has excess inventory or has built up idle capacity, then bartering offers an excellent way to move goods and improve operations.  Bartering has been known to help companies during recession and get inventory off the shelves.  Small business owners often look toward bartering to quickly get rid of outdated assets and aging inventory. In addition, small businesses owners who operate seasonal businesses can use bartering as a technique to exchange goods and services during slow periods. At certain periods during a business life cycle, small businesses will have periods of slower cash flow or limited capital. Every small business experiences periods when cash is tight. The failure to pay your bills can be embarrassing for owners and can have harmful effects on your name and business. Start-ups with a limited amount of money for growth and expansion often turn to bartering as a way to acquire needed services such as plumbing services, website design, and marketing and advertising. Furthermore, bartering can help build customer loyalty. When one business is connected to another through barter exchange, the businesses involved are connected by more than a simple transaction; they are connected through a network.

Disadvantages:

Although barter can be a helpful tool for small businesses, it can expose businesses to a few traps and drawbacks. Foremost, businesses may not put a very specific measurement, or cap, on the goods and services being bartered. For example, a new food-services entrepreneur offers his accountant free food in exchange for vital accounting services; he finds himself catering lavish events for the accountant’s corporate clients, without any compensation. The value of services the accountant provides does not nearly equal the value of the catering costs.  In addition, providing poor goods or services can have detrimental effects on the business’ reputation. Lastly, businesses may find that the range of products or services available does not fully address their needs, or they may not be on hand when needed.

Tax Implications:

Contrary to what many people believe, bartering is not a method of evading taxation.  According to the IRS, when goods or services are bartered, the fair market value of these goods or services must be reported for tax purposes.  The fair market value of the exchange is taxable as income and the cost of producing the asset exchanged in a bartering transaction is treated as an expense in the year in which the exchange took place.  In addition to this, any costs that were incurred to facilitate the exchange are deductible.  Although bartering does not provide a means to evade taxes, it may still be used as a method to decrease your taxable income.  This is possible due to the fact that the fair market value of a good or service is frequently less than the revenue that would be received if the item was sold at full markup.  In such a situation, reported profit and taxable income is decreased by bartering, in turn, creating a smaller tax liability.  On a small scale, this tax benefit does not have a large impact; however, if your small business barters several thousand dollars worth of goods each year, the financial impact can be quite large.

A First hand look at Bartering in the College Station Community:

Bartering takes place in every community in the United States; to gain a firsthand insight into the process and its effects on small businesses of our community, our group interviewed a couple of small business owners.  We asked small business owners to put “barter” into their own words and in both interviews they shared that barter is about “trading for goods/services you don’t have; it’s about getting what  you need and not having to use money.”  (Luis Montemayor, Fredrikos)  No small business can provide for all its needs by itself so these opportunities to barter are a great benefit.  The small businesses we researched bartered for a variety of things including: food/drinks, car washes, legal services, and the biggest being advertisement.  Milo Grey of the Excel Group stated that “bartering is a simple and informal process for us; our chain of small businesses are in close proximity to each other so we can just walk across the street to get something we need.  We like to keep barter within our family of small businesses and similar small businesses.  This helps maintain a close and trusting bond between us.”

Bartering for advertisement is a very interesting process.  Many times advertising agents will go to a small business and offer advertising space for barter and some monetary compensation.  Luis Montemayor of Fredrikos Mexican Restaurant stated, “I’m in the restaurant industry so advertising is very important; any opportunity to trade advertisement for food is a great benefit for me.  An agent and I will usually work out an agreement that ends in advertisement for half of its regular cost and half in gift certificates for the restaurant.”  After learning about barter and advertisement, it is clear that barter is an important outlet for crucial business services and marketing strategies and not just small day to day needs and services.  The advertisement gained through barter helps build and expand a small business’ clientele base; small business revolves around its customers so gaining them through barter is a huge advantage.

Bartering for legal services provides another interesting look into how versatile barter can be.  Luis Montemayor of Fredrikos states “bartering with my lawyer had its perks; it helped us build a relationship because of the understanding that was reached through barter.  I would provide him with gift certificates and food while he helped me on the legal end of my small business; not dealing with money all the time made it a more personal and fulfilling experience.”

Bartering in our local small business community is very important and occurs on a daily basis.  “Sometimes you just need something like napkins and walking across the street to get them is extremely convenient.”  (Milo Grey, Excel Group) Barter for these small everyday needs saves a lot of time for small business owners.  One of the downsides of bartering is when employees do not report inventory as they should.  Milo Grey of the Excel Group states “Someone taking a case of plastic cups may forget to mark them off of the inventory sheet so we may come up short.”  Other than minor misunderstandings or inaccurate recordings, barter is full of advantages for small business owners.  Each small business owner we interviewed had a very positive outlook on barter and its effects on their business.

Works Cited

“Barter for Small Business?.” Morebusiness.com. 12 Oct 1998. morebusiness.com. 28 Jul 2008 <http://www.morebusiness.com/running_your_business/businessbits/d907965346.brc&gt;.

Grey, Milo. Personal interview. 20 Jul 2008.

Montemayor, Luis. Personal interview. 22 Jul 2008.

“Small Business Tax Tips.” Gaebler Ventures. Gaebler Ventures. 28 Jul 2008 <http://www.gaebler.com/Bartering-and-Taxes.htm&gt;.

Zahorsky, Darrell. “Discover the Rewards of Small Business Bartering.” About.com. About.com: Small Business Information. 28 Jul 2008 <http://sbinformation.about.com/cs/smallbizlearning/a/barter.htm&gt;.


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