At a recent dinner with small business owners, a woman entrepreneur recommended that small companies barter their services instead of charge for them. I’ve never bartered before, so I thought I should look into it.
Small business owners regularly barter with other businesses directly, offering consulting for fitness services, for example. But, that’s just the beginning. Bartering, it turns out, is big business, and growing!
Barter exchanges have been around for decades. These organizations formalize the process of earning and spending ‘hours’ or ‘trade dollars.’ Some of these organizations are community based, and at least one of them is a franchisor. There is no charge for some organizations, and a sign up fee in the hundreds of dollars for others.
Here’s how a bartering system works for small businesses. A restaurant needs a website, so “purchases” time from a designer. The designer needs computer services, and “purchases” service from a computer store. The computer store needs broadcast ads and “purchases” ad time from a radio station. The radio station needs a giveaway for a promotion, and “purchases” a dinner for two from the restaurant. All of these “purchases” are made without cash through the money equivalent of the provider’s time and services.
Especially since the great recession, community barter is growing. In Ithaca, NY, for example, the value of an HOUR is equal to $10, the county’s average wage. People in Ithaca can buy goods and services with their “HOURS.” “The HOURS circulate within the community.”
Note that barter has been recognized by the IRS since 1982 as legal tender, so it is not “tax free.” Barter exchanges are considered third-party record keepers, like accounts and banks.” The exchanges are required to issue a form 1099-B to clients or members and to the IRS.
Barter can certainly help the cash flow of a small business. And it can help a new business build a client base. Can a small business grow and thrive long term on barter?
Banks don’t accept barter for loans, including mortgage payments. Nor do insurance companies or the IRS. Barter isn’t accepted to fund 401Ks. Tuitions, for the most part, are not paid through barter. Doctors and hospitals are not looking to barter. Employees and contractors, in general, are not interested in barter as payment for their time and services because they, too, have mortgage payments, insurance, medical costs, retirements to fund and tuitions to save for.
While bartering may be a great opportunity for you, be sure you have enough cash paying clients to pay all the cash-based bills. Plus, a profit margin of real dollars will make it easier for you to get a loan. And, remember to invest real cash in your 401K for the day when there are no more products and services to barter!