In this article, I discuss my experiences with bartering. Bartering refers to the trading of goods or services in lieu of a cash exchange. For example, I once entered into a barter agreement with my good friend who is a professional website designer. In exchange for him re-designing my business website, I DJ’d his wedding. This was an ideal barter situation because I was in dire need of web design services and would have spent thousands of dollars otherwise. I received top notch web design services, and my friend received top notch wedding DJ services.
Beyond personal barter transactions, there are “barter exchanges.” I’ve been a member of a network called “Barter Depot” (formerly BarterIt) for the past five years. The way that this particular group works is that thousands of companies are listed on a barter “exchange” (think of a stock exchange). There is a wide range of industries represented – for example, auto mechanics, hair salons, photographers, attorneys, restaurants, summer camps, vacations, show tickets and even dentists.
Under the barter exchange system, a participant earns dollar for dollar barter credits for services rendered. For example, if I performed a $600 DJ service on barter, I wouldn’t receive any cash, but rather would have my barter account credited for $600. Then, I can spend these barter credits on a cashless basis with vendors listed in the network.
There are transaction fees. I pay an annual fee of $125 to be a member. On each trade – whether buying or selling – I am charged 7% (this gets paid in cash on a monthly basis to the company administrating the system). These transaction fees are not inconsequential. Barter members are forbidden from inflating their customary charges to recover transaction costs.
Every December, my barter network has an annual holiday gift fair, where members can spend dollars on hard goods for holiday shopping. The selection and quality of the offerings are not the best, but there are still nice items to be found.
Barter networks promote themselves by stating that barter business leads to cash business. By being out in the field performing at parties, you can market your services to party guests and earn new cash jobs.
It is also important to note that services rendered on barter are subject to tax. The barter exchange provides an annual 1099 to participants. And sorry, the IRS does not accept barter credits for taxes owed!
Guidelines for Using Barter Exchanges
If you feel that bartering may be a good fit for your business, here are some suggested guidelines based on my experience:
Check the depth and quality of services in the network. Ideally, you want to find a network that offers high quality services that you were planning to purchase anyway. If your network offers few appropriate or quality members, you may find yourself trapped with a large balance of unspent barter bucks.
Limit barter business to a certain percentage of sales. For my business, I would not care to have more than 5%-10% of business on barter, as I have a large number of expenses that must be paid in cash.
For DJ multi-op owners, try to personally perform at barter jobs. Avoid offering your employees/subcontractors on barter, as you must pay your staff cash, meaning that these transactions are cash flow negative to your business in the short-run. A caveat – if you have a flexible employee who could use services in the network, you may be able to have them perform jobs on barter, or a partial cash plus barter deal.
Always remember that cash is king and the lifeblood of a business! Use barter to save money on cash expenses but be prepared to limit your services offered on barter if you find yourself getting squeezed on cash.
Make sure that you understand all of the transaction costs of a particular barter network. When alternate barter networks are available in your local market area, compare them side by side.
As for my own personal journey with barter, I’ve been sweating it out for the two past summers at a premier local camp. By the end of this summer, I’ll have over $5,000 barter dollars in my account to spend. I always prefer cash after a hard day’s work (barter bucks just don’t feel the same), but I look forward to spending my balance on something nice for our family – perhaps a vacation.