Here’s an interesting story by Eve Mitchell of the Contra Costa Times on how small businesses can use bartering instead of money to stock up on supplies or better serve their customers. Mitchell also offers good information on hooking up with barter networks and on the tax implications of bartering.
When Oakland restaurateur Henry Vortriede needs to get some more bread for his eatery, he doesn’t have to spend cash to buy it. Instead, he turns to barter, an ancient form of commerce that is attracting new converts during a struggling economy.
But Vortriede isn’t restricted to bartering directly with a baker down the street in exchange for providing free meals at his Montclair Bistro. That’s because the restaurant is among businesses that belong to fee-based online barter networks that make it possible to trade with many businesses.
“I’d rather cater a holiday party, and get a couple of thousand of BizX dollars, and then spend that on our bread, coffee, wine, and plumbers and electricians,” said Vortriede, who belongs to BizX.com, a Washington state-based barter network operated by BizXchange. He has also used BizXchange dollars to cover construction costs for adding a banquet room.
The advantage to bartering for businesses it that is allows them to pay for goods and services with trade dollars instead of using cash, to get rid of excess inventory and find new customers through a network. Barter networks can also provide qualified members with a line of credit that can be an alternative to a conventional loan. A downside is that goods and services obtained are typically not discounted as they might be in the non-barter marketplace.
It’s not just small- and medium-sized business that turn to the barter economy. Fortune 500 companies also barter. Businesses can use their trade dollars — which amount to an internal currency recognized only within the network — to buy goods and services from other members. Some barter networks are regional, while others are national or international.
There is neither an advantage nor disadvantage to using barter instead of cash for business expenses.
That’s because taxes still have to paid on barter transactions.
Tony Cassara, owner of Cassara’s Fine Men’s Wear in Dublin, Calif., is a member of IMSbarter.com, a Wisconsin-based barter network run by International Monetary Systems Ltd. He has used trade dollars to help manage excess inventory and pay for business expenses.
“Barter is better for business. It is not cash,” said Cassara.
When a purchase is made, trade dollars are deducted from the buyer’s online account and added to the seller’s online account. Debits and credits of trade dollars are done electronically.
Barter networks can free a business from having to spend cash, but they are not free to use. For example, there is a one-time cost of $795 to join BizXchange, along with a monthly $30 membership fee, plus a 6 percent transaction fee on every purchase and sale.
At IMSbarter.com, there is one-time cost of $695 to join, along with a monthly $12 membership fee, plus a 6 percent transaction fee on every purchase and sale.
The fees charged by barter networks cover the cost of providing a bartering platform, the services of barter account executives who work with members, and acting as a third-party to send out paperwork required under Internal Revenue Service rules.
Barter exchanges also extend lines of credit to qualified members so they can make purchases before they have made sales. The lines of credit are paid back in the form of trade dollars made from sales to other members. (Interest charged on lines of credit goes into a special fund to cover lines of credit that are not repaid.)
Barter networks tend to get more popular during a rough economy, said Chris Haddawy, founder and chief operating officer of BizXchange.
“People are definitely more interested when economic times are hard. We are really in the business of marketing someone’s excess capacity. If a dentist would like patients in his chair for 40 hours a week, and right now his business has only enough business for patients to be in his chair for 35 hours … this is excess capacity.”
By joining a barter network, that dentist could sell those unused five hours to members, then use the trade dollars to help pay for business expenses, explained Haddawy.
“It becomes much more interesting to people and they react much more positively when business is slower, as it has been in the last couple years,” he said.
Trade transactions at BizXchange have gone from $30.6 million in 2006 to $63.8 million in 2009, the last year figures were available.
Worldwide, barter networks accounted for about $12 billion in transactions among members in 2010, according to the International Reciprocal Trade Association.
Taxes on bartering
Income tax rules for bartering require that the fair market value of the goods and services exchanged must be reported as income by both parties.
This is true for both informal, one-on-one barters between individuals or businesses or for barters that take place on third-party basis through a barter exchange company.
If you are operating a viable bartering business, you may be entitled to deduct business expenses related to the goods or services you provide. Barter exchange companies are required to issue Form 1099-B,
Proceeds from Broker and Barter Exchange Transactions, annually to their clients or members and to the Internal Revenue Service.
Source IRS
Where to find one
A partial list of barter networks:
American Commerce Exchange: Click here
American Exchange Network: Click here
BizXchange: Click here
International Monetary Systems Ltd.: Click here
Premier Barter: Click here
Source: International Reciprocal Trade Association
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