Trading Up

Barter's Downsides

But barter isn't better in every way. One frequent complaint is that businesses with something to trade can't quickly find a barter partner for a specific product or service. "That is a disadvantage," acknowledges Joan Varner, co-owner of Illinois Trade Association, a barter exchange in Niles, Illinois. "You may have to be willing to wait."

Contrary to popular belief, barter carries no inherent tax advantages. The IRS regards barter exchanges as the same as cash deals, says IRTA executive director Krista Vardabash. "It's taxed just like income," says Vardabash. "One barter dollar is equal to one U.S. dollar."

Commercial barter exchanges work closely with the IRS. Members of such exchanges receive 1099 forms at the end of the year to report their barter transactions, so the appropriate taxes can be levied. With direct barter, it's different. Although taxes are due on direct trades, collecting them is another matter. "[The IRS] knows they can't control that," says Vardabash, who works closely with the IRS on policing exchange barter.

Barter isn't for every company, either. Hospitality and media goods and services are the biggest categories of commercial barter. Items such as unoccupied hotel rooms and unpromised radio airtime are ideal barter goods, because they're highly perishable--if no one uses them, they're wasted. So if you either provide or consume travel, entertainment, advertising or similar goods and services, you're a good candidate for barter. "The businesses that do best in barter are retail, service and professional--anybody with a disposable commodity that has no shelf life," says McDowell.

Many other goods and services, from carpet cleaning to new automobiles, are actively traded on exchanges and between direct-barter customers. If, however, you provide only one specialized product, such as a part used in one machine made by one manufacturer, you're not a good candidate for barter, since you won't find many--or any--takers for what you are offering. The same goes for highly specialized services.

Barter How-To

If you're interested in barter, you must first decide whether to try direct barter or a barter exchange. Experts like Malitz recommend exchanges for their convenience and flexibility. These networks act as brokers connecting hundreds or thousands of businesses in a system that allows them to exchange their offerings for barter dollars, which can in turn be swapped for goods and services offered by other members. The exchange adds value by assigning you a barter broker who can help you locate the barter products and services you need. In addition, the exchange keeps track of the paperwork, collects fees on the transactions to all parties and reports to taxing authorities.

Direct exchanges sound comparatively simple--you scratch another business owner's back, and he or she scratches yours. No paperwork or fees are involved and, in the vast majority of cases, taxes are not paid. No wonder direct barter is overwhelmingly more common than commercial barter. It does have its challenges, however.

The first is finding someone who has what you want, wants what you have and is willing to barter for it. Vivien Teo, a 28-year-old partner in New York City startup Vroom Media Group LLC, ran into a lot of skepticism and blind alleys when she looked for chances to barter her PR and brand marketing firm's services. "When we tried approaching some businesses about bartering, they were not very excited about it," she says. Teo kept at it and eventually found suppliers willing to barter for photography, and web and logo design. She even found a spa that would swap PR work for free treatments, which Teo has used both to pamper herself and to reward clients.

Even if it takes a while to find a willing trader, don't be too quick to jump into the deal. The second challenge of direct barter is not letting others take advantage of you. You don't want to trade your goods or services for something of lesser value. Knowing your own margins is essential to bartering effectively, Vardabash says. Knowing your barter partner is equally critical.

Kazimir says he was only comfortable with his website-for-training swap because he took the time to get to know his prospective barter partner. The two held hour-long, semiweekly meetings for two months to discuss what their expectations were and how they would price their respective contributions. "I'd recommend bartering with someone you know," Kazimir concludes. "And I'd look for something, like references, that makes you feel you're dealing with somebody trustworthy."

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This article was originally published in the February 2005 print edition of Entrepreneur's StartUps with the headline: Trading Up.

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