This is a guest post from Andréa Coutu.
So you've got big ideas but no way to pay for them: a home renovation, weekend getaway, successful business, dream dinner date, leaner body, new bedroom suite…the list goes on and on.
Maybe your bank account has seen better days, or maybe you just don't want to tie up more money in pursuing a dream. Well, money is just one medium of exchange. By using barter, you can tap into a range of goods and services — all without spending a dime.
Barter in Real Life
When bartering services, you trade your time for someone else's specialized time. For example, a personal trainer I know exchanges training sessions for childcare, marketing, advertising, photography and other services that help her business thrive. Of course, to make the barter work, she has to find someone who can offer the services she needs — and that person needs to see value in what she has to offer.
A graphic designer friend often does work for high-end restaurants — the kinds of places that charge $40 or $50 just for an entrée. She puts together restaurant advertisements, newsletters, menus, postcards, direct mailers and other projects. In exchange, the restaurants pay her in gift certificates. The great thing about the gift certificates is that she can give them to friends, relatives, and corporate clients. By trading her services for an hour or two, she can treat her husband or her top client to a $200 dinner.
Through bartering, you can gain access to a wide variety of services. A marketing consultant I know has traded consulting services and been able to build a thriving empire. She's gained executive coaching, website development, photography, graphic design, advertising, writing and strategic business consulting. In fact, she even connected with my personal trainer friend to swap childcare and personal training sessions.
Banking on the Barter System
But what if you have time to trade, but no one willing to use it? You can join a formal barter exchange. That way, you can “deposit” your time into a “barter bank” and “withdraw” it for later use. 
Say you mow lawns for a daycare center, for example, but you have no need for childcare. The daycare can pay you “trade dollars”, which you could use at another business in the barter network.
So, in exchange for mowing the daycare's lawn, you could use those trade dollars to pay for a fancy dinner at a local restaurant, get your mower repaired by a technician or advertise your services in the Home & Garden section of the local newspaper. Most barter companies charge an initiation fee and monthly, annual or transaction-based fees, so make sure you're going to use services more valuable than those fees.
The Benefits of Bartering
You might wonder why you'd barter when you could just pay for the services. Well, unless you are running your business or personal life at full capacity, you probably have a little downtime now and then. If you've got a business, you have fixed costs to pay whether you're working round the clock or not at all. So, by trading otherwise unused time or products, you can generate revenue.
For example, if you would otherwise not have any lawn mowing clients on Monday mornings, you could provide barter services during that slot and earn credits, without needing to sit idle or discount your price. All you're giving up is some time, but you might earn credits worth $100 or $500 for that time, depending on your charges.
Some barter exchanges will also allow you to charge a minimum fee, to cover the costs of hard goods. So, for example, if you provide painting services, you might charge a $15 an hour fee plus a $25 an hour barter credit. That way, you can pay for paint and rollers, while still trading your time on barter.
Tax Implications
Depending on where you live, you may need to report barter as income. In the United States and Canada, you need to include bartering in your income taxes. If you receive $100 worth of bartering services to a friend or colleague, you need to declare that “income”, even if you swapped your time for it.
So, if you think barter might work for you, try approaching people with your ideas. Some businesses list barter services on their websites, whereas others are happy to talk off the record. Just ask around — it never hurts. And let your friends, colleagues and — if applicable — your customers or blog readers know that you have services to barter. You may find that opening yourself up to barter helps expand your professional network.
Andréa Coutu runs the Become a Consultant Blog, in addition to a thriving marketing consulting firm. She is the author of Discover Your Inner Consultant and Consulting Fees: A Guide for Independent Consultants. She happily considers barter services.
What a great idea! I am interested to barter with a web/blog designer/consultant who wants to barter for my following professional services:
* legal advice
* English lessons
* how to succeed in law school
* how to ace your job interviews
* people skills at work (office politics)
Andrea and J.D., thanks for this great post!
I created a web site for an artist friend in exchange for a painting of hers. She has her website (up for over 2 years now) and I’m still waiting for my painting… now what?
Ageekymom has an interesting point: barter only works if both sides carry through. However, this is also true in monetary transactions, too. I’m not sure it’s an inherent flaw of barter. You can pay for work that never gets done. Or, more often, you can do work for which you are never paid.
For example, when I was doing computer consulting, I had one client who would call me in a panic because they had a virus (or whatever), I’d rush over there, spend three hours fixing things, issue an invoice, and then never see payment. Obviously, this arrangement only lasted a short time. This client still owes me a few hundred dollars, but at this point I just don’t care.
However, I think that our legal system is much better able to handle traditional monetary transactions than barter transactions. I’m not sure what happens if somebody screws you with barter. If they screw you with money, you have legal recourse.
Oh yeah — I meant to say that I recently did my first barter transaction. One of the contractors working on our house was interested in an old computer monitor I was no longer using. I was able to swap this monitor for a few hours of his time. Pretty cool!
Honestly…who would report barter income on their tax return? I’m normally a very “do it by the book” guy, but the government can’t possibly enforce this rule. There’s really no reason to do it.
Michael-
By a very “Do it by the book” guy do you mean you are a decent honest man unless you aren’t going to get caught?
That does not lead to someone being wealthy in all area of their life. It just leads to a slightly fatter wallet at the expense of others.
@ ageekymom and J.D.
Barter contracts (whether oral or written) generally work the same as contracts for cash payment of products or services.
But there is a statute of limitations which varies from state to state and, there are always exceptions to the general rules. For example, if you were in CA, and if your contract was oral, you have 2 years from the date of breach (broken contract). Or, if your contract was written (and still in CA), you have 4 years.
So, it may NOT be too late — depending on your facts and the laws of your state — to file a lawsuit. The real question is whether it’s worth it.
A small claims court (sometimes called “the people’s court”) in CA is limited to claims of losses worth up to $7,500, and it’s relatively cheap and easy to file and handle a claim there. (If you can’t afford it, you can even get those fees and costs waived.) It’s also less stressful b/c the other side can’t hire a lawyer to represent them in a small claims case in CA. But, if the painting is worth a lot more than $7,500 and you’re not willing to give up the rest of that excess value (by the way, if it’s the actual painting you want and not the cash value for it, you can’t seek that in a small claims court), you’ll have to hire a lawyer and file in the general claims court, or “superior court” as it’s called in CA.
There are a number of reasons you might not want to seek any legal action as a result for this problem if you want the actual painting.
1. The person might simply hide the painting and say they no longer have it, in which case you can still sue for the dollar value of it. (If you can’t establish the dollar value of the painting, you can seek the dollar value of the services you rendered.)
2. You might want to keep a good relationship with this person, which is often more valuable than the amount in dispute. Then, for heaven’s sake, don’t mention any lawsuits!
3. A lot of times, you have to chalk these deals gone wrong up to business losses (all part of the cost of running a business) and learn what you can from them — even when they are “for cash” transactions.
A tip for next time: Draw up a written contract for the barter deal. It doesn’t have to be fancy. Just the basic terms, the services to be exchanged, when the services are to be completed, and signatures of all parties. The greatest effect of such a writing is much like a premarital or prenuptial agreement: Just having it often prevents the breakup!
You can even include the following provision to provide that extra incentive to both parties: “In the event that any dispute arises from this contract, all parties agree to the following: IF ONE PARTY BREACHES THIS CONTRACT AND THE OTHER PARTY INCURS ANY COSTS WHATSOEVER TO ENFORCE THIS CONTRACT, THE BREACHING PARTY OWES THE OTHER PARTY ALL REASONABLE COSTS OF THAT ENFORCEMENT, INCLUDING ALL REASONABLE ATTORNEY FEES, EXPERT FEES, AND COSTS OF COLLECTION OR LITIGATION.” If you do include this provision, include an extra set of signature lines under it. If this doesn’t deter someone from cheating you, I don’t know what will!
Also, in the event the person does breach, if you take this contract to a lawyer and ask if they will take the case, most should be glad to because they know their bills will get paid — by the other guy! Assuming the other guy has money that can be reached by the court and your facts are good enough to convince the lawyer that you will in fact win the case b/c the other person in fact breached the contract.
Phew! How’s that for free legal advice?
Barter is still a contract. So you can enforce the contract if the other party takes part. I heartily recommend using contracts, even for barter. I know a graphic designer who insists on it.
And, yes, you’re supposed to report barter on your income tax. I had to tell you that. You’re also supposed to report garage sales, eBay sales, gifts of more than $X, the money you receive for babysitting, etc. Consider that as you will. :)
I can see the pros and cons of bartering in general, but the “Barter Bank” is absolutely ridiculous.
Performing a service for someone in exchange for a universally accepted currency which is then kept at an intermediary to ensure safety and integrity.
How is that any different than paying someone cash for work, and them using that money later to pay for a service they want? This is just reinventing the wheel in a major way to seem smart and sell books/generate ad revenue.
I pretty much agree with Adam.
While I can see how bartering might be useful in certain situations (and only with specific parties), in most situations, paying with currency is a whole lot easier and, come to think of it, you could even get the same ‘tax-benefits’ if you just paid ‘under-the-table’ for both transactions. Although that is obviously illegal and the same as bartering without reporting it on your taxes.
Market economies were developed to make the exchange of goods easier than bartering (and lots of other stuff too I’m sure).
For ageekymom’s transaction, and other transactions that are not done with set time frames, it is probably easier to just do two monetary transactions rather than a barter.
The Wikipedia entry is also interesting:
http://en.wikipedia.org/wiki/Barter
It seems like the usefulness of bartering in a market economy is the marketing aspect of it, more so than anything else.
I’m with Adam on this one. I know of a great “Barter Bank” whose “Barter Dollars” are accepted all over the place. It’s called the “Federal Reserve” and I believe they call their “Barter Currency” “US Dollars”. Seriously, why would anyone pay a fee to use someone’s fake currency?
I’m not knocking bartering in general, mind you, but if you’re going to use a currency or a “bank”, just use your national currency. I don’t see how using a “barter bank” makes it any easier to sell or trade your downtime for dollars, fake or real.
Adam, barter exchanges/banks allow you to “pay” out barter credits without using cash on hand. So, even if you’re a profitable business but you have tight cash reserves — say huge contracts that won’t be paid out for months — you can use the barter credits. It’s a way to improve your cash flow situation — the main challenge for small businesses. You can also pay bonuses to staff via barter credits, take clients out for lunch, buy items for your own business. If you go into barter “debt”, you won’t be paying credit card or line of credit rates. You can use idle inventory or slow periods to draw in customers. For example, a painting contractor could pledge 100 gallons of paint during the rainy season, rather than having that sit around till spring. But she can use the barter credit to buy other goods and services in the meantime, without waiting to have cash in hand.
Barter exchanges also help avoid contractual problems. If the firm with which you’re bartering goes bankrupt in a one-to-one exchange, you’re hooped. But, with an exchange, you still have your credits to use with other members.
The barter exchange/bank also markets your goods/services and helps you find partners with whom to trade. And they keep track of all the records for you. So, depending on your situation, it may make sense to take part in a barter exchange.
So, this is different from paying cash, because you don’t have to have cash in hand. You can use idle inventory and downtime to improve your cash flow situation.
If you’ve got lots of cash, no inventory and no downtime, it may not make much sense for you — unless you’d like to expand to new markets, connect with new customers, etc. But if you have that problem, it’s a nice problem to have!
Andrea, I appreciate your taking the time to respond, but I’m afraid your comments still don’t explain why someone would want to use a barter bank over regular currency. Of course barter banks allow you to pay out barter credits when you don’t have cash. On the other hand, if you worked for cash, you would have cash on hand. In fact, you would have exactly the amount of cash on hand that you would be able to spend in barter bucks, plus you wouldn’t have to pony up any fees to the barter bank.
The main benefits you mention, improving cash flow by taking advantage of idle time or extra inventory, are not dependent on using a barter bank, or even on bartering in general. If it is true that there are no interest penalties for barter debt, I assume it is also the case that you do not earn interest for barter savings.
And paying bonuses in barter bucks? I know I would much rather be paid in regular dollars, which I can spend anywhere, than in barter credits, the use of which is restricted to a small, artificial economy created by the barter bank.
You are right that it is different from paying cash, because you don’t have cash in hand. What you neglect to mention is that the exact cause of your lack of cash in hand is your choice to sell your time and stuff for barter credits instead of cash.
I LOVE to hear stories of where people actually barter in this day and age. We had the inside of our house painted in exchange for a parrot, lol. I think we got the better deal out of that one.
Nbdean,
If you can’t immediately find someone to pay you for your services, you can’t work for cash to have cash on hand. (Or sell goods to have cash on hand, as the case may be.) The barter banks allow you to pledge time/goods for later delivery, while taking advantage of the cash in the meantime.
There are many ways to free cash flow. Barter is just one. But it is one that makes sense for a lot of people.
You’re not earning interest on barter savings because you’re pledging something you haven’t actually delivered yet.
If you have free time or unused goods and you need help connecting to others who could buy from you, the barter exchange/bank may be a good fit. You can go up there today, get $500 in services and not have to deliver your end of the barter till you have clients next summer. Normally, when you do barter, you have to find someone who wants what you have to sell. And to have cash in hand, you need a paying client right now.
As for bonuses, I meant bonuses as in perqs. I didn’t mean that you get your personal bonus as a wholsale crate of jam. :) As an employer, you could treat your staff to a nice night out, gift certificates, sports events or whatever — perhaps to celebrate a big deal that is complete but not yet paid for.
If you don’t currently have anyone willing to give you cash and you can’t find someone willing to barter for what you have available, a barter bank or exchange is a way to solve that problem. It is certainly not the only way to free cash flow. But it’s cheaper than factoring invoices, taking out a line of credit, throwing something on your credit card or, depending on your line of business, going without needed resources. That’s all.
I don’t use a barter bank. I don’t have a hard time finding people to buy from me. And there are so many people who want my consulting services that I can always easily find someone who wants to do barter in this economy. I also make my clients pay 50% up front. So I don’t have cash flow problems. But some people have a net 90 day period before they’re paid. And that’s where this can help. Or where they need help marketing their services — this is niche marketing.
Many people provide discounted rates for things they barter. They are charging fair market value, but targeting customers who price discriminate. So the barter banks also arrange transactions based on that principle.
Andrea, thanks again for your comments. I’m glad you’re willing to respond to us, and clarify some of your points. As someone previously completely unfamiliar with barter banks, I’m afraid I did not immediately understand the ‘line of credit’ point until your most recent comments here. It seems, then, that one of the major advantages of the barter bank is as a lending institution which does not charge interest. It instead charges periodic or transaction fees.
While borrowing ‘dollars’ this way may or may not be a good idea, your most recent comments seem to go against one of your original points about making good use of your downtime. If you cannot find anybody willing to pay you cash during your downtime, and you are only ‘pledging’ services for later, it seems like you end up performing those services in a time other than the downtime of which we would like to take advantage. If you are already as busy as can be mowing lawns in the summer, pledging in the winter to mow more summer lawns won’t help you at all.
As for interest, naturally you would not earn interest on pledged services. I was referring to the case where you perform services, and receive your credits, but don’t want or need to cash them in yet. With regular currency, you can put this saved money in all manner of interest bearing assets. Thus the lack of lending interest is mitigated by the corresponding lack of saving interest.
I think that the main point Adam, todd, and myself are making is that most or all of the benefits that you are touting for barter banks do not derive from their use of barter credits. You are just using different terminology than that which traditional banks use. When you receive a loan from a bank, you ‘pledge’ a certain amount of money for a later date, that you will earn through providing goods or services to others. And traditional currency has the huge advantage of being far more widely accepted (and easily transferred from one bank to another). When you use any kind of currency, even if it is called a ‘barter credit’, you are not really bartering. Bartering, by definition, is the exchange of goods and services without a currency. So the real question is, if you are not bartering, what kind of currency should you use, federal or ‘barter’ bank?
Waaaaaay to much bother to accomplish what currency already accomplishes.
I understand that in the interest of keeping up appearances, the author was obligated to include the disclaimer about taxes, but let’s be honest here – nobody’s going to claim bartered services on their taxes. That’s a large part of the attraction of bartering in the first place. It’s a simple way to cut out the tax man. Taxes represent a huge drag on your expenses, so if you can get the same services by bartering instead of paying cash, and thus eliminating the tax man, you’re already a good 30% ahead of the game.
Honestly, that’s really the only benefit I see of bartering over simply using cash. Andrea is beating around the bush a lot and dancing around the issue, to avoid coming right out and saying “the tax man can’t track this stuff,” but seriously, that’s what this is really all about, isn’t it?
My web development business has been a member of a formal barter network for a while. It was neat at first. We would only take on barter work when we had extra man hours to dedicate. But it’s become increasingly difficult to find uses to spend our “barter dollars” of which we’ve amassed over $10,000. And, of course, they don’t earn interest.
Kevin, I suspect you may be right about the big elephant in the room named taxes, although I believe there are a few situations where bartering makes sense even without the tax considerations.
In my experience, bartering or trading makes the most sense among friends. There may be times when you and a friend could benefit from each other’s time or things. Including cash or formal prices in such transactions is an easy way to damage your friendship. For example, we have participated in babysitting exchanges in the past, and although we could have included cash in the transactions, it was simpler and friendlier to just take turns.
Using currency for services or goods between friends can be uncomfortable, and can lead to a distancing of the relationship. Of course, many people help friends and receive help in return, and would never call it any kind of transaction, bartering or otherwise.
The truth is, if we were to be incredibly strict about every little service we performed or received, we’d all be declaring a lot more on our taxes. If you’re neighbor let’s you borrow a tool, do you ever think about stating the equivalent cost of renting that same tool as income? Of course no one does. As the transactions become more formal, and the value of the goods or services increases, the obligation to report it as income becomes more serious. Anyone who barters with regularity or for nontrivial value should understand that not reporting or underreporting barter income is dishonest, and could be considered tax fraud. If they want to, then, they cheat at their own risk.
nbdean,
I think you found the main usage of bartering… between friend/family/people you know and trust.
We probably do it all the time without realizing it. It’s not exactly bartering but rather helping out your friends when they need it…and in turn your friends will help you when you need it (if they are real friends).
Have you ever helped your friend move?
Given him/her some old item you did not need?
I know I have, and I don’t expect an immediate return. I just help the people close to me, and know that they will help me if/when I need it.
I have gotten computer parts from friends who don’t need them anymore. I have also given people CD’s, appliances, etc. that I don’t use anymore.
This is not exactly bartering, but it is similar and I think it is related and it is important to help your friends out.
todd,
I think you’ve summed it up pretty well. Sometimes the help you give to friends is substantial or comes at significant inconvenience or sacrifice. If this is combined with a reciprocal offer of similar service, it is perhaps accurately labeled as a barter. Otherwise, it is mostly called simply being friends, or helping each other out, etc.
They are all different flavors of the same idea, and they work best, as you say, among people you know and trust.
I’ve always viewed the bartering good for using skills you may have that you are otherwise “not” being paid for. My husband and I do this a lot. Being both salaried employees, in which working extra hours does not equal extra money at our jobs and not wanting to tie up all our free time trying to run a business on the side, bartering has been a great way for us to afford to get services we may usually forgo, without having to get crazy over advertising, networking or tieing up free time we don’t want to. We have traded computer repair, website builds, website hosting for things like plumbing, electrical work, pressure washing, carpet cleaning and an assortment of other things.
We don’t want to get locked into contracts and we like the freedom to decide when we will provide the service. Not something you can do when asking someone to pay cash for the service. Granted for us, we usually require the other party to provide the service at the sametime. You bring the computer over and we’ll fix it while you’re fixing our toilet. We always agree to either party paying for whatever parts are needed, we are simply bartering our time spent and use of the tools they have.
Though admittedly, I never got the barter banks either. Other then the simply fact that you may lack the cash flow to pay for the service up front but are willing to spend the time in trade to get the service… there’s not much more sense for a barter system.
My brother is having his bathroom completely redone. If he had to pay for materials and labor at full cost, it would be at least 3K. Instead, thanks to the plumbing and other work he has done for friends in the past, his pals are returning the favor in a big way by donating materials and labor. He expects to pay no more than $500 total.