Bartering can help you use your company’s funds in a better way. You can save a lot of company funds and increase your purchasing power if you barter some of your products or service. Monetary medium of exchange lets you exchange things with money, but once your inventory builds up and sales are slow, there is almost nothing you can do to make a return on your initial investment. Bartering can support your business at times like this.
There are principally two forms of bartering. Keep reading if you’re new to bartering and learning how to use this age-old method of conducting business. We’re talking about the two ways to conduct barter exchanges. Bartering is sure to increase your profit and manage your inventory better. There is more you can do by using a barter system.
Bartering System: An Overview
As you might be aware, the barter system was used before the monetary system was introduced, i.e., before the existence of currencies (paper notes and coins).
Suppose I am a poultry farmer, and you grow wheat. I’ll exchange a dozen eggs with you for a kilo of wheat, and the exchange was done. There was no need for money.
The system worked well as long as life was this easy. The need for monetary systems was realized, and currencies were introduced. Exchanging goods with money is very convenient, so people slowly moved away from bartering. There was no need for a double coincidence of wants, and monetary systems were fair.
In the 1970s, businesses realized the effectiveness of barter when used alongside monetary systems. Bartering is now quite famous among businesses of all kinds.
We live in a time when the inflation rate is high, and a monetary crisis can happen at any time. We experienced an economic crisis during Covid-19 as well. Although the crisis primarily impacts the country and financial economy, business owners face the most significant blow. Things change suddenly, and the company funds don’t suffice. Barter can help you keep your business running smoothly even during a crisis. Why? It doesn’t involve money, remember?
The barter economy is huge; International Reciprocal Trade Association (IRTA) reports that the annual volume of barter transactions is close to 12-14 billion dollars. Many businesses have experienced the numerous benefits of barter. Now, it’s your chance.
Following are the two ways you can barter goods and services today.
Two Types Of Barter Systems
If we were to classify barter transactions based on the two parties involved, there could be many types of barter transactions. However, every type of barter trade falls into two broad categories- direct barter and barter exchanges.
Direct Barter
Direct barter is a barter system where you conduct the barter transaction without the involvement of a third party. It can be a bilateral barter involving only two parties exchanging goods or services or turn into a triangular barter (3 trading partners).
Direct trade usually occurs between businesses that rely on each other’s goods and services. These transactions are conducted on mutual understanding without any government body. The law would be followed, but there is no third party who decides things here.
If two companies or individuals have goods and services that the other one needs, a direct transaction is possible. You don’t have to pay any membership fees to conduct this transaction.
There are four main features of a direct barter, as mentioned below.
- Parties are interdependent on each other’s business offerings.
- Both parties should be potential bartering partners of each other.
- The frequency of bartering with each other is higher.
- There is mutual understanding among the two trading partners, and no third-party involvement is required.
Benefits Of Direct Barter
Apart from the standard benefits of a barter transaction, like saving money, moving inventory, advertising, customer acquisition, increased sale and profit, and much more, direct barter has a few added advantages.
One is that we don’t need membership fees to conduct the barter. On barter exchanges, membership fees are required.
Another advantage is that you can expect a higher frequency of barter transactions with the other party because of the excellent relationship you both have built. If the frequency of barter transactions is high, you can reap the benefits of it in a better way.
When Is The Ideal Situation For Using Direct Barter?
Let’s take an example to understand this better. For example, you are a graphic designing firm. You will certainly need a lot of laptops, computers, stylus pens, and other technological devices. Instead of looking up for a business bartering electronics on barter exchanges every time you need electronics, you can offer a barter to an electronics store or manufacturer you know. In exchange for devices worth $1500, you can provide them with your graphic design services to prepare hoardings, posters, and other promotional items worth the same money. Here both parties are interested in each other’s good or service, so you can expect repeat transactions.
Barter Exchanges
Barter exchanges are membership-based trading exchanges governed by a third party. The exchange keeps track of all the transactions of all the members of the network. All the debits and credits are noted. Much like the bank does.
Have you ever heard of mutual credit networks? These are small networks where trading occurs within the network’s members using their own currency system. It could be trade credits or anything else. Similarly, there are many such exchanges that you can be a part of.
With barter exchanges, you are not restricted to conducting transactions with the businesses you know. You can meet up with other businesses and conduct transactions using trade dollars.
What are trade dollars or trade credits, or barter dollars?
Just like money is used for daily transactions, trade dollars are used in barter exchanges. So if you sell something to a barter exchange member, you’ll get paid in trade dollars, and then you can use these to barter something that might help your business.
The six main features of barter exchange are mentioned below.
- A third party governs it.
- You can deal with businesses you never knew.
- You have to pay membership fees.
- You can conduct barter only with individuals and businesses from the network.
- All of your transactions are recorded.
- Exchange happens with the help of trade dollars or barter dollars.
Benefits Of Barter Exchanges
The most significant advantage of barter exchange is the convenience of using trade credits. Sell what you want and get what you want using your trade credits. You don’t need to achieve a double coincidence of wants.
On an exchange network, you’ll get a chance to meet a variety of businesses. Moreover, the network will help you find people you can barter with. You are not restricted from making a deal with the businesses in your network.
Barter exchanges are great for B2B marketing. You might find your next B2B customer here. You never know.
A third party governs the exchange, so there is no chance of exploitation.
Barter transactions are taxed. You have to keep a tight record of all the transactions. You don’t need to worry about records if you conduct transactions via an exchange network. The exchange records every single transaction that you do.
When Is The Ideal Situation For Using Barter Exchanges?
Barter exchanges can be used when you don’t know a business with whom you can barter or if you are interested in conducting many barter transactions.
A good example is a corporate and office stationery supplier transaction. You will always need to restock office supplies. So instead of using your working capital, you can barter the office supplies whenever you need from any business on the exchange network that sells office supplies. A corporate might not have anything to give in return to the supplier, so using trade credits here is ideal.
Barter exchanges are suitable for frequent corporate barter transactions. Corporate barter means a barter transaction between two corporates. For example, you can barter with a cleaning service for your restaurants. Instead of using your working capital for these overhead expenses, you can use barter exchanges to find relevant services.
Modern Barter Exchange
Modern barter exchanges run on the internet. You can become a member of any exchange by paying membership fees and exploring all the bartering possibilities. If you find something your business needs, you can use your trade dollars to acquire it.
In the eyes of the Internal Revenue Service, trade dollars are equal to US dollars, making barter money taxable. And this is true for barter transactions done using trade dollars and without using trade dollars as well. Tax can be in the form of income tax, self-employment tax, excise duty, and capital gains tax.
Although there is no money exchanged, barter transactions have tax implications. If you trade a few items with your friends, that is technically a barter, but it is exempt from taxation. A taxable transaction is, however, utilizing your friend’s service for the benefit of your company.
Therefore, you must declare any purchases made for the company using the barter system that you would have made in cash otherwise.
If you do it via an exchange, your trade dollars are considered your barter income. Direct barter doesn’t rely on trade credits, so you must use the fair market value of the goods acquired in the declaration.
Conclusion
Although it was used ages ago, barter is still relevant today. You can make greater profit and savings when used alongside the monetary system. Bartering is an excellent opportunity for large, medium, and small businesses. You can save up a lot of your money and still be able to source raw materials and other services. It will increase your purchasing power and help you manage your inventory. If you cannot find a business to barter, you can register to a barter exchange network.