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Barter a Bit and Give Your Cash a Rest - The Wall Street Journal.

Small Business
Barter a Bit and Give Your Cash a Rest

March 16, 2008

When C.J. Cameron, owner of a small travel-marketing company, needs a vacation, he doesn't call a travel agent or search for deals online. Instead, the Palm Springs, Calif., entrepreneur logs onto Barter Bucks -- an online service that helps businesses trade goods and services with other individuals and businesses.

Through the network, he can exchange his "credits," which he collects for providing his consulting services and discount passes to other entrepreneurs, for nights at hotels that also trade through the same network. He figures by bartering with other businesses he doesn't have to worry about whether he has the cash to pay for it.

"When I need something, before I write a check or use my credit card, I go to the barter site and see if it's there or not," adds Mr. Cameron, who says he currently has $40,000 to $60,000 worth of "barter credits" to spend. He estimates he does about two or three transactions a month, and he also found his dentist through the network.

Bartering, of course, is an age-old practice. But for small businesses and solo entrepreneurs, it can have real advantages -- and it's gaining new appeal as the Internet makes it easier to find potential trading partners.

Untapped Cash Flow

The benefits of bartering, and whether it makes sense to barter, vary from business to business. Swapping allows businesses to receive goods and services they need without tapping into cash flow. It's also a good way for a business to unload excess inventory and forge new relationships with other businesses that may someday lead to cash-paying customers.

Though some entrepreneurs may see bartering as a way to dodge taxes by not dealing in cash, the Internal Revenue Service requires that the fair market value of bartered goods and services be reported. In other words, if you receive accounting services valued at $500 in an even exchange for auto repair, you would report that $500 as income.

New Clients

Bob Meyer, founder and editor of BarterNews.com, an online newsletter devoted to the barter industry, says the best candidates for bartering are business owners with some extra goods -- or time to provide work in trade -- who are looking to increase their client base. Generally, businesses should aim to do no more than 10% of their business through barter, since it can't replace cash altogether, of course. You're just "helping your cash situation," he says.

Businesses should probably not barter, however, if it means turning away cash-paying customers or sacrificing time that should be spent on growing a business.

Despite the possible benefits of bartering, there is the difficulty of finding trading partners. The odds of a piano repairman finding a plumber who just happens to need a piano fixed are slim. To remedy this, so-called barter exchanges have sprung up over the past few decades that create more efficiency in the barter system.

Here's how the exchanges usually work: Instead of that piano repairman finding the plumber with the broken piano, he simply finds any exchange member who needs a piano fixed. Providing that service earns the piano man a "trade currency" that can then be used to pay any of the plumbers who also belong to the exchange. Piano man doesn't have time to arrange all of this? The exchanges generally have barter "brokers" available to set up transactions.

Transaction Fees

Most exchanges charge fees of about 10% of the value of each transaction, which is usually split between the parties, and many charge start-up fees of up to $500 or monthly membership fees. The exchanges also act as third-party recordkeepers, tracking members' barter transactions and reporting barter income annually to the IRS.

Some exchanges like Itex Corp. and International Monetary Systems operate nationwide with more than 20,000 members. Others specialize in a particular city or region. Mr. Meyer estimates there are about 400 exchanges in the U.S. with roughly 300,000 members in all.

A growing portion of bartering is happening online, and sometimes through newer Web sites that facilitate trades but with lower costs than the traditional exchanges.

U-Exchange.com lets members post profiles and contact each other directly for direct trade. The site is free. Another site, BarterYourServices.com, charges a membership fee, but no transaction fees to find trading partners. BarterBucks.us charges a 10% transaction fee, split between the giver and receiver, but uses trade currency like traditional barter exchanges.

Is It What You Need?

Entrepreneurs should be careful about signing up for an exchange or bartering Web site, especially those charging a sign-up fee, without first doing the necessary research. Exchanges should provide a list of locations and types of businesses, so prospective members can determine whether joining is worth the price.

And some entrepreneurs simply prefer to barter with other entrepreneurs they already know. Paul LeVine Mellion, the owner of an adventure travel company in northern California, says he barters regularly for services he needs or wants, including massages and computer repairs for his office. Sometimes he'll suggest to current clients that they barter instead of paying cash.

"For me, it's about forming close relationships and helping each other out," he adds.
• Kelly Spors covers small business for The Wall Street Journal. Email: kelly.spors@wsj.com

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