5 Perils of Direct Swap Barter and How to Avoid Them

Business owners are always seeking ways to increase sales, improve cash flow, and thereby increase their bottom line cash profits. One way is to implement some barter strategies. But there are several perils to avoid.

Everyone is familiar with a direct swap barter. It's pretty straight forward. You trade what you have for what another has without using cash. 

There are inherent advantages to barter what you have for what you need. Essentially, you get a new customer and new sales revenue. You conserve the cash you would have otherwise spent and effectively finance your purchase with the new business. In a way, you are guaranteeing a sale when you make a purchase in the barter transaction. Looking at it from a different angle, you’re purchasing at your wholesale cost or cash cost of sale. Your overhead is still covered through your regular cash sales. Your buying power increases. Bartering also gives you a competitive advantage. You can match your competitors offer or quote while accepting a portion of the business in trade, reducing the cost for the buyer while adding to their revenue with a new sale. A true win-win…except for your competition.

So why don’t more business owners barter as a purposeful part of their marketing and operations strategies? There are several reasons.

First is the difficulty of initiating. I call this the Haves/Wants Mismatch. If the owner of a print shop needs to get some dental work done, how long will it take to find a dentist that is willing to trade printing for a teeth cleaning, x-rays, and exam? Certainly not a very effective use of time. However, one could also look at the opportunity as cold calling for more printing business. Nonetheless, it would be difficult and feel like you’re looking for a needle in a haystack.

Second is the high likelihood of a Value Mismatch. Rarely will the values be exactly equal. More than likely, one or the other party will have to put some cash in the deal to make it work out even. This person will feel the benefit less because of this. In the printer and dentist scenario, the two may decide that the dental services are equal to a box of business cards, letterhead, and envelopes. Hopefully they are both being honest or at the very least already know fair market value of what the other is providing.

Third is a Timing Mismatch. Consider what happens if more work is needed in that mouth. Will the dentist need several thousand dollars of printing done today? Probably not. But they could have a simple “IOU,” right. Yes, but what if one or the other goes out of business or sells the business. Things happen, and in the delayed performance barter transaction someone almost always loses. Not tracking each others' performance is the main pitfall of a direct swap barter transaction when there is a Timing Mismatch.

Fourth is the Lack of Documentation and Reporting. Someone is going to want to document their expense in order to get the tax write-off. Many CPAs do not know exactly how to document a barter transaction. Fortunately, the IRS has a whole section of explanation of how to report these types of income and expense. In short, the goods/services received are the income and the expenses directly related to what you provide are the expense. Many think a direct swap means no tax implications. That couldn’t be further from the truth and IRS reality. If you’d like an example specific to your business, I would be happy to work you through that. Just give me a call or an email.

The bottom line is getting the short end of the stick. In talking to hundreds of people who have done direct swap barter transactions, someone always feels that they got shorted in one way or another. It could be that values really didn’t match. It could be that someone didn’t perform as agreed. And worst of all it could be the IRS audit.

Now, how to avoid. Know the fair market value of what the other will trade before suggesting a barter deal.

Second, try to never do a transaction where one side or the other is not performing to completion in exactly the same time frame. A good example would be a window washer washes the windows at a restaurant valued at $20. Then they sit right down and enjoy a lunch valued at $20.

Third, avoid most of the perils by documenting the transaction with invoices clearly detailing who is to do what in exchange for the other. This documentation can help in situations where one wishes to pursue a shortfall in performance legally. This one step will take care of most of the potential perils.

Finally, the best way to increase cashless transactions in order to increase bottom line cash profits is to utilize a virtual currency. These are otherwise known as Modern Barter Exchanges.

ITEX has been helping businesses with cashless transactions since 1982 when we created our Virtual Currency known as ITEX Dollars. ITEX Dollars are a federally recognized currency and ITEX does all the reporting for its member businesses.

The printer could buy as much dental services as needed and the dentist does not need to want or buy printing. The dentist would accept the ITEX Dollars and would ‘bank’ them with ITEX. Then when he wants to go on vacation, get a massage, have a monitored security system, or whatever, he would pay those vendors with his ITEX Dollars.

Further, the window washer could be paid in ITEX Dollars and buy an oil change or vehicle magnets without having to direct swap for a meal.

Direct swap barter can be valuable and fun. Just proceed with caution.

Utilizing ITEX Dollars is exciting and fun.  It retains the cashless advantages while avoiding the major perils of direct barter.

Join for free for a limited time  www.itex.com/getstartedLearn more at www.B2BVirtualCurrency.com

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