Whether you are starting or growing a small business, using a barter system preserves working capital to apply to your venture. Also called in-kind trade, trade-outs, counter-trades or contra agreements, this type of process can fund day-to-day operational expenses without cash outlay.

By definition, bartering is the exchange of goods and services for other goods or services. The International Reciprocal Trade Association estimates that $8.25 billion bartered items exchanged hands in 2004. Even so, some business gurus believe companies are not maximizing their own barter possibilities.

Benefits of Bartering

A barter arrangement's most obvious value is in significant cash savings, as well as reduced financial paperwork -- but there's more. Bartering also:

• Generates sales/profits with faster inventory and service-hour turnover
• Creates new customers by bringing together parties who may refer others
• Moves surplus stock
• Eliminates additional advertising and deep discounts

When to Barter

A barter system can involve swapping big-ticket items, but many small-company owners stick with products and services required for routine operations. These include:

• Office supplies, printer/toner cartridges, food service, renovations/repairs
• Printing, computer products/services, trade show booth space
• Communications, Internet access, cellular phones, electronics
• Staff incentives and community sponsorships
• Financial services, legal advice, health care, advertising or promotion

How It Works

The barter process, unlike a cash transaction, requires no exchange of money between trading parties. However, barter dollars are identical to real dollars at income tax-time, so owners must report the fair market value of goods received on their tax returns.

In fact, entrepreneurs should treat barter revenue like any of their other business activities, making sure to:

• Keep good records.
• Specify the retail value of products being exchanged.
• Work with a good barter exchange.
• Consult a tax professional, if necessary.
• Complete Form 1099-B (if a barter exchange member).

Barter Exchanges

A barter exchange is an organization that facilitates trade between group members. Exchanges also act as banks, recording transaction values and member-account activity.

Approximately 700 barter exchanges are currently in operation, giving unprecedented exposure to potential new customers through:

• Listings in online and other directories
• Member recognition through barter newsletters, catalogs and product expositions
• Fellow network-member referrals

When selecting an exchange, contact an industry trade association such as International Reciprocal Trade Association (www.irta.com) for a list of member groups. Then, do some digging:

• Contact colleagues and clients for references, and check with the Better Business Bureau or the Chamber of Commerce for satisfaction ratings or complaints.
• Make sure an exchange offers products or services that fit your needs.
• Consider size. Larger exchanges can provide better opportunities to make appropriate trades. Upon gaining a bit of experience, consider joining additional exchanges to broaden your options.
• Evaluate membership dues and other fees. Expect to pay a one-time fee of $200 to $800. Each trade could incur a cash commission of 10 to 15 percent.

How to Establish a Trading Partnership

The most fruitful bartering partnerships typically start with an organized plan. Veteran barterers are likely to:

• Make a list of products they need, but are unable or unwilling to purchase with cash.
• Identify possible trading partners. These may include:
  
  
  • Business associates
  • Existing customers
  • Members of local exchanges
• Gather references on the trading partner prior to opening negotiations.
• Initiate discussions with the owner or CEO of a potential business partner. Staff may not be familiar with trading policies.
• Document all agreements and procedures.
• Train staff on trading procedures, which do not include standard invoices.
• Re-evaluate partnerships annually to ensure continued benefits.

Protecting Your Interest

While bartering can be a boon for companies on tight operational budgets, problems can always arise. Here are some words of caution:

• Barter exchanges are often profit-driven associations. Compare groups to examine benefits and membership costs, and to obtain member references.
• Beware of troubled companies seeking bankruptcy – you may never receive your share of the barter agreement.
• Attach a time or money value to the barter. Both parties should compare the barter in a quantitative fashion.
• Record any conditions or restrictions prior to signing an agreement.
• Offer a product or service at advertised retail value. Do not over-inflate.
• Don't undermine trades with junk or rejects. Quality products will reap quality goods.
• Always be sure a trade arrangement is in the best interest of your business.

Let the Bartering Begin

By observing a few rules, doing some homework and applying a good measure of common sense, most business can reap the rewards of bartering. A better cash flow, new business and a fresh marketing path are within easy grasp.