Cash flow is always an issue for entrepreneurs. It often seems to go out more quickly than it comes in. So, how can you get creative with your finances? Part of it boils down to using other currencies- aside from just money- to help you run and grow your business. In fact, your products and services have great value that you can “spend” through barter arrangements.
Done correctly, you can use barter partnerships (shall we call them “barnterships”?) to meet your company’s needs without an excessive cash outlay, while building great relationships in the process. However, without proper preparation, you can also lose your shirt in a deal or even face unexpected tax bills.
Here are seven basics that you need to know before entering into your next barter agreement.
1. Pick the Right Partner
Make sure that your “bartner”- aka your barter partner- has a good reputation and shares your overall values. This means seeking out past business associates with whom you have a good relationship or seeking recommendations from others you trust. If you expect to barter regularly, consider joining a barter group that verifies or rates participants, or even a barter exchange that intervenes in negotiations.
2. Establish a Fair Exchange
Even in barter arrangements, the dollar remains the core standard of value, so both parties need to set (and agree to) a firm dollar value for the goods and services they’re exchanging.
Then, make sure that you establish an equal-value trade, such as a medical office entering into an agreement with a law firm: four free medical checkups in exchange for four free contract reviews, with a value of $1,000 for each party.
Think twice before entering into an arrangement that exchanges goods or services of dissimilar value or type. If your beauty salon tries to exchange free haircuts with a law firm, you may find yourself cutting the same head of hair until long after it turns grey in order for the exchange to equal out.
Also, stay clear of lopsided arrangements that seem to benefit you. You don’t want the other party to do a lousy job or feel like they are being taken advantage of- that can impact the quality of the trade and the relationship.
3. Start Small
Successful marriages commonly begin with a first date over dinner before moving on to more … uh … interesting activities. Keep your first barter with a new partner like first date – small and low-risk.
This is not the time to bet the farm. Even if you both have honorable intentions, things can go south, often due to different contract language interpretations or lack of follow through. Until you know that you can really work with and trust this partner, keep it small. Start with a small exchange and build upon that over time if it works out.
4. Put it in Writing
The idea of bartering typically brings to mind a hand shake over the fence. A hand shake is technically a legal contract, but try proving it in court. A barter agreement is just as complex as a cash-based arrangement. You need to identify every possible detail, write it all down and sign on the dotted line.
Document every detail thoroughly. And if you create a product or service collaboratively (such as working together to create an email list), specify what happens at the end of your agreement. If your barter partner takes full ownership and you can no longer use it after a defined time period, perhaps you should agree to supply fewer names than your partner.
5. Establish Clear End Dates
Your agreement may last for a week, a month or longer, but not forever. It absolutely needs a defined end date. Even if you enter into the identical arrangement many times in the future, it’s best to create a new contract each time. If your first agreement worked well, creating the next one will be a simple matter. But, if you discovered that some provisions didn’t work as expected, you can tweak the next version the next time.
6. Communicate Frequently
Don’t wait until the final deadline date to find out how things are going. Define key milestones with your partner and check in on those dates to ensure that you’re both on track and maintaining appropriate quality levels.
Naturally, when unexpected issues arise, don’t wait for a milestone date to speak up. A setback on one side can affect the other side. Plus, an informed partner may have a solution to fix the issue.
7. Educate Yourself on Tax Consequences
As long as you trade goods or services with a cash value, the taxing bodies generally want their share. So, do not enter into a barter agreement before checking with your accountant.
At the very least, the IRS typically requires that you report barter arrangements on your tax forms. If you exchange like goods or services, however, you gain and lose valuable assets. So, you may not need to pay excessive (or any) additional taxes if you properly track both sides of equal-value exchanges. But, the IRS valuation rules can be complex. It’s worth repeating that the advice of a knowledgeable accountant is essential.
Using your know-how as a currency can be a big boost to your business, but take it one step at a time and do your homework upfront so that you reap the full benefits and minimize the risks.