Bartering transactions can help you get resources without making any cash payments. No, you won’t get it for free. A barter transaction is a widely used system by businesses that can help them buy goods or services in exchange for items. The exchange of money does not take place in barter transactions.
In this post, we shall find answers to some questions like, what does bartering mean? What is a barter exchange? How can it help you save on some business expenses? What are the major blunders that you should avoid at all costs?
Let’s begin right away.
What is barter?
The barter system was being used by people ages ago. Before we started using actual currency people would exchange a commodity for another, instead of money. For example, you need a pair of shoes but since there is no currency exchange involved, you decide to exchange them with a basket of fresh fruits. Now, you have to find a person who wants fruits and is also selling a pair of shoes. This is what the primitive simple bartering system looked like.
There is a major flaw here and that is the availability of that exact person who needs what you have and is selling what you need. Modern barter systems have resolved this issue by forming a barter exchange network or a barter exchange.
The barter economy is getting bigger day by day. International Reciprocal Trade Association (IRTA) has given an estimated range of the barter economy to be in the range of $12-14 billion.
Many businesses use barter to avoid the flow of cash. It also lets you use what you already have to acquire something you need for your business. During Covid-19, barter exchanges became a savior for businesses.
For example, you have a restaurant but due to the pandemic, the restaurant is closed. You could barter your chairs and other furniture to a wedding planner to be used in a wedding in return, you’ll be getting something that you may need to keep your restaurant deliveries going. You can also exchange your goods for barter dollars or trade dollars. You can use these trade dollars to buy someone else’s barter property that is beneficial for your business.
Direct bartering VS barter exchanges
There are two types of barter systems- direct and barter exchange.
Direct bartering as the name suggests is a one-on-one transaction that happens between two businesses without any interference from a third party. Some companies who are interdependent on each other’s barter properties will stay in the loop to exchange goods and services whenever required.
Another system is called a barter exchange. Exchanges are platforms where both buyers and sellers are present and a third party mediates and manages the transactions.
All the goods and services exchanged are tracked and recorded by the barter exchange. The organization also provides you with your tax reports and will also help with their barter accounting services.
The advantage of the barter exchange network is that you are exposed to more businesses than just a few in the loop. Moreover, there is a third party to help you decide what is worth the commodity you are bartering.
Exchanges usually work using trade credits. These are credit points or barter dollars that you get when someone buys your commodity. You can use this to buy something for your business from the exchange members only. They are not real dollars that you can use anywhere. You can use these trade credits only in the exchange network.
Common mistakes to avoid in a bartering transaction.
Now that you have a clear idea about the barter system, we shall now discuss some common mistakes people make in bartering transactions. If you start bartering make sure you don’t make these blunders.
Selecting the wrong business partner
You must ensure that the person or business you are working with is providing you with a decent service or item in the barter because there is no cash involved. Not only should the barter offer be good, but so should the partner. Find someone you can trust and negotiate with calmly.
If you are doing it one-on-one please make sure that you are bartering with a good partner. Their goods or services should be of great value for you to exchange something valuable. Both parties should decide the value of the commodities that they are exchanging. Even during the negotiation, be smart enough to judge if you are getting something of a lower value.
Within exchanges that are monitored by a third-party organization, such cases are rare. The organization will evaluate the worth of your service or commodity and will credit or debit barter dollars in your account upon sale or purchase.
Neglecting the tax liability
Well, even though a barter transaction does not involve any money, it is still a taxable transaction. The IRS will be investigating the barter transactions as well. You will be liable to pay sales tax and income tax. When you are bartering make sure you have planned well about the tax return as well.
If you are in an exchange network, the platform may do your barter tax reporting annually so you don’t have to keep a record of it.
Not using original documents
The barter transaction is backed up by a legal agreement that outlines all of the rules and circumstances that govern your trades. It is proof that barter occurred between the two parties. A lot of people use the same documents that they used in the previous barter transaction to save money and time. However, not only is this against copyright law but can also create more problems for you in the transaction. You can take help from legal services or use royalty-free templates available online.
Not determining the correct fair market value
Fair market value is the value that your service or commodity holds in the market. You should calculate the value of your service accurately. It is not very uncommon in bartering that when the deal happens either one party is getting something worth more/less value than the other. If you price your service higher than the fair market value it is called overvaluation and if you price it less then it is called undervaluation.
Why is valuation so important? Since we are not exchanging the service with money, you have to decide the worth of your service in the market to ensure that you are getting something of the same value in return.
Exchange networks are governed by a third party and they determine the correct fair market value for your goods and services to avoid the cases of one party getting more benefits than the other.
Bottom line/Conclusion
Bartering is great for businesses to save some money and get benefits from the commodities that are not in use. Whether you do it one-on-one or are bartering via a network, there are some mistakes that you should not make at any cost. Avoid these mistakes and enjoy the benefits of the barter system.
Recap
- People used to swap commodities instead of money before we started using real money.
- To prevent the flow of cash, many firms employ barter.
- Direct bartering is a one-on-one transaction between two firms that takes place without the involvement of a third party.
- Exchanges are trade marketplaces where buyers and sellers meet, with a third party facilitating and administering the transactions.
- Trade credits are commonly used in barter exchanges.
Common mistakes
- Selecting the wrong business partner
- Neglecting the tax liability
- Not using original documents
- Not determining the correct fair market value