Using Barter to Grow

Barter exchanges can help you build your business without spending a lot of cash

By Amy Barrett

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Kaestner says ads he placed through barter deals have increased his landscaping sales Stefan Hester

Jake Kaestner wanted his five-person landscaping company to grow, but he didn't have much money to invest in the business. In 2005, after hearing about ITEX, a national barter exchange, Kaestner, founder of Kaestner Lawn Care in St. Peters, Mo., gave it a try. On barter exchanges, members earn barter dollars by doing work for each other. So Kaestner's $500,000 company did about $4,000 worth of landscaping at the home of another exchange member, a massage therapist. Kaestner turned around and used those barter dollars--currency good only between members of the exchange--to buy advertising in a local paper. "I didn't do any advertising before because it gets expensive," he says. Kaestner has since used barter dollars to buy advertising in local magazines, newspapers, and coupon books. He says those ads are a big reason revenues increased 30% in 2006 and 25% last year.

Whether by working through an exchange or directly with another company, bartering can help you boost your business without spending a lot of cash. About 400 barter exchanges in the U.S. and Canada do $4 billion a year in transactions, says Tom McDowell, executive director of the National Association of Trade Exchanges (NATE) in Mentor, Ohio. Barter can be great for startups as well as for seasonal businesses or those with excess capacity. A restaurant with some empty seats most nights, for example, might put gift certificates on an exchange and use the barter bucks raised to pay for cleaning services. "It's great at smoothing out the peaks and valleys [in demand]," says Craig Vestal, owner of $1 million Portage Printing in Portage, Mich. Using the Midwest Business Exchange, Vestal prints brochures and business forms for local companies, including restaurants and a radio station, and spends some of the barter dollars he earns to pay for dental work for his seven employees.

Joining an exchange does entail costs, including fees and commissions. If you run a very low-margin business, those commissions may make bartering a money-losing proposition. Every business will want to limit its barter business to 5% to 15% of total revenue so that cash flow remains at healthy levels, says Ron Whitney, executive director of the International Reciprocal Trade Assn. (IRTA), a Rochester (N.Y.) nonprofit that promotes barter. And if you are bartering one-on-one, be careful. Misunderstandings can arise if you don't have a formal contract. Then there is the IRS: Barter deals have to be treated like regular cash sales in federal and state filings. If a business owner uses barter services for personal reasons, the cost of the item is considered compensation on your income.

WHAT YOU'LL PAY

Some exchanges charge new members up to $800 to join, although others have no advance fees. Most have monthly flat fees of $10 to $30 and, for each completed transaction, collect a cash commission of about 10% to 15%, which is either paid by one party or split between the buyer and seller. Once you sign up, you will receive a list of participating businesses. Some exchanges allow members to trade goods and services directly on their Web sites. Others have members work together on deals, or rely on brokers to play matchmaker, or some combination of the three. The exchanges send monthly bills to members and provide yearend statements for business tax filing.

You can find lists of exchanges at nate.org or irta.com. Most exchanges are local, though ITEX is a national network. Ask for a directory of members from the exchanges you're considering--if they won't give you one, move on--and make sure that members have products or services you want. Also check that there aren't many members in your line of business, or you'll have too much competition. Then call some members randomly and ask how well the exchange makes matches. Anytime you barter for a product or service, make sure the price is similar to what it would be in a cash deal.

If you do go it alone, a contract can provide a safety net in the event of a disagreement over who was supposed to do what. And be sure to keep track of the sales and expenses for your tax filings. Even the best deal isn't worth much if it gets you in trouble with the tax man.

Back to BWSmallBiz April/May 2008 Table of Contents

Barrett is a senior correspondent for BusinessWeek SmallBiz.