To Barter, Or Not To Barter: That Is The Question

October 20, 2017 / Published in Information

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Small business bartering is when a business owner trades goods or discounts at their store for services such as legal consultation, accounting service, repair work, etc. In other words, it is an exchange or trade the business owner’s goods and services for another business’s goods and services. Thus, when a restaurant owner trades a free lunch at their cafe for a nutritionist’s consultation, no cash is involved in the transaction. Depending on the terms on the terms of agreement, bartering can be advantageous or disadvantageous to a business owner.

Advantages of bartering

Let’s begin by listing the benefits that bartering may have to offer. There are a range of advantages for small businesses when bartering.

  • Flexible compensation
  • Employees can be compensated with benefits even when the cash flow may be low. For instance, a restaurant owner may offer free food for their employees without it drastically effecting the cash flow. Some companies are even known to have set up a monetary system of credits for their employees. It is a more sophisticated option for companies using accounts to barter credits for a range of services. In general, one can free up space shedding excess inventory. This allows for keeping more cash on hand which greatly enables flexibility.

  • Inventory & debt solutions
  • Small businesses can use excess inventory and used equipment to recoup profits. It is eminently suitable for companies with excess inventory or old equipment who can sell the excess or unneeded items for financial benefits through bartering. For example, extra muffins could be exchanged for the option to advertise at an office. This sort of bartering is often used to cut down on business travel expenses. Sometimes expenses and debts and very important to be resolved to maintain solvency. However, debt collection or a lawyer has no certainty of be being effective. So, another solution is to offer debtors the option of paying in merchandise or services. This can then be bartered again or sold to recoup profits in an effectual manner. For example, let’s say an event management company offers to host an event for a real estate developer but they have no means of payment. They might offer in exchange valuable furniture recouped from old homes that they could resell. Or they might offer a steep discount with a contractor to paint the walls of their office.

  • Build valuable partnerships
  • Bartering is a potentially valuable tool for small businesses to contact and gain new customers or influence. Often you can bring a partner to the table informally and build respect to create a long-term business relationship. Also, bartering and word of mouth can ripple to gain contacts and influence in spheres that you would not have thought or been capable of effectively advertising to. If a seasonal business perhaps has difficulty in non-seasonal months, then bartering can help level out the seasonal cycles. If a start-up is working with limited cash at hand, then bartering can be used to ease that gap or to expand more smoothly.

    Disadvantages of bartering

    Often there can be many downsides that are dismissed by a business owner when attempting to facilitate a bartering deal.

  • Devaluation
  • Bartering can easily devalue the business owner’s own product or service because there is no clear cash price tag attached. So, for instance if the restaurant owner wants to consult with that same nutritionist again it is unlikely that they would pay cash for a meal because they never have before. People can perceive bartering as desperate or as doing them a favor which may leave them feeling insulted if the bartering ceases. If a business owner barters too much, then it can make them feel unnecessarily guilty just for demanding the proper value of their own goods and services.

  • Lack of profit
  • Bartering automatically means no cash is involved so any profit is intangible and not concrete. Considering the potential costs of bartering when we have no guarantee of it being worthwhile is often far more risky than beneficial. If a restaurant owner offers to host a small event at their cafe for minimal costs on the promise of a later more lucrative event, then they have no certainty of not losing money. Furthermore, plans change so easily that attempting to barter in such a way is not only risky but stressful considering how many people are not actually comfortable being clear and firm when negotiating.

  • Tax complications
  • Regardless of if one barters or not, they are still required to pay taxes for your concerns. It can make a simple tax situation more complex and cannot be written off as a donation or a loss. Government most surely is not as flexible, and it is a dangerous mindset to slip into in financial areas. Business can too easily forget that they must claim any services that they receive on their taxes as income. For example, if a business barter advertising services for dinner coupons, they must report the fair-market value of the advertising as income and the other business must report the fair-market value of those coupons as income.

    The advantage to bartering is the sheer flexibility of options that it often creates. If a solely monetary situation is creating the problem, it more advantageous to pair bartering and the normal cash flow together to allow diverse approaches. But on the other hand, it may not be worth it to barter for small businesses because it more often transforms into a disadvantageous or inconvenient situation that makes it is difficult to extricate oneself from without some enmity. So, all in all, we can say that bartering can work for some small businesses and may not be worth the time and effort for others. Businesses should therefore carefully assess their options and weigh the costs and benefits before they enter into a bartering arrangement.

    As a small business owner, have you bartered? If so, how was your experience? Share your thoughts with us and our readers in the comments section below.

    A penny for your thoughts!