Make purchases without cash

Tina Ames, owner of Craftsmen Cafe, got a new roof in exchange for a pickup truck she no longer needed.

Silver Cup Coffee owner Christian Kar has bartered for Web site design, a walk-in freezer, a phone system, vehicle maintenance, plumbing, catering for a company party and a parking lot paint job.

Joe Gallenberger, owner of Cream City Music, often trades guitars for advertising.

The barter business

In a tough economy, more small business owners are conserving cash by bartering. The U.S. boasts some 500 barter exchanges - here's a sampling of established and reputable outfits.

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(FSB Magazine) -- Tina Ames owns the Craftsmen Cafe, a Clarence, N.Y. eatery that specializes in organic comfort fare such as chicken soup and apple pie. Recently she needed to replace her restaurant's roof, a $7,000 job. Ames was loath to part with that much cash and didn't want to take out a loan.

Her solution? She cut a deal with a local contractor who handled the roofing job in exchange for a Ford F-150 pickup that Ames no longer needed. "I grew up on a farm," she says. "If you had eggs and someone else had corn, you traded. It's an old way of doing things, and it makes a lot of sense."

Even in modern times, bartering remains a practical choice for small businesses. It's a cash preservation tool, something that's especially useful in a tough economy. It can also help move unsold inventory or put idled staff to work. Done right, bartering can even drive new cash business.

Many trades get executed informally, as when a dentist cleans her accountant's teeth in exchange for tax preparation services. But increasing numbers of small businesses are joining barter exchanges that make it possible to arrange trades within a large online network. U.S. exchanges now boast about 250,000 small business members, up from 200,000 five years ago, according to the International Reciprocal Trade Association (IRTA), based in Rochester, N.Y.

Because so many swaps are informal, the size of the small business barter economy is hard to gauge. But Bob Meyer, publisher of Barter News in Mission Viejo, Calif., was willing to take a crack at it. Meyer estimates that 1 million small businesses are involved in barter, either informally or through exchanges, with a volume of transactions approaching $20 billion annually. This figure combines the $10 billion that IRTA attributes to exchange trades with Meyer's conservative estimate that informal barter accounts for another $10 billion.

Typically, bartering activity spikes during economic downturns. Meyer expects the total volume of U.S. barter transactions to grow 10% this year (historically the annual growth rate has hovered around 5%). "Right now many small businesses are starved for customers," he says. "If you're a savvy owner, barter is just another doorway that brings customers into your establishment."

Drew McLellan runs the McLellan Marketing Group, a firm with 10 employees and $5 million in 2008 revenues. A resident of Des Moines, he's a devotee of informal barter and sees a real advantage in doing deals within a tight-knit community of trusted owners. "These are my neighbors," he says. "I know I'll bump into them at a Starbucks (SBUX, Fortune 500), so they can't afford to mess up and neither can I."

Even so, McLellan is careful to draw up a contract whenever he barters. As in any business deal, the contract is a crucial formality that entrepreneurs neglect at their peril. At the very least, experts say, the parties should exchange e-mails that establish a written record of their intentions. In the event that one party reneges on the deal, a properly drafted barter contract would stand up in small claims court. More important, a contract sets terms so that both parties know exactly what's expected.

McLellan recently cut a barter deal with a local Internet provider: His firm created a print ad for the Web business, and McLellan received a high-speed connection and two years of service. McLellan values each party's contribution at $10,000 -- the amount he would have billed for the ad, and also the cost of getting a much-needed Internet connectivity upgrade for his firm.

Like so many small business owners, McLellan is spooked by the economy's free-fall. Lately some of his clients have delayed payments because of cash flow problems. Bartering for Internet service allows McLellan to preserve his precious cash for rent, utilities and salaries. "I'm in ultraconservative mode," he says. "Barter is a great way to nip and tuck operating expenses."

McLellan also cut a deal with Des Moines consulting firm Kick in the Pants, which is drawing up a strategic road map to help his firm grow. In return, McLellan developed a cardboard point-of-purchase display for a card game called Do You Q? that Kick in the Pants is shopping for sale in bookstores and other retail outlets. The deal values each party's work at $7,500, McLellan says.

Because of the soft economy, McLellan's firm hasn't been working at full capacity. The barter arrangement gave McLellan's employees, who typically create advertising posters and direct-mail pieces, the chance to try something new. "It allowed them to stretch their skills, particularly the junior staffers," he says. "And now my firm has a new offering -- retail point-of-purchase displays -- that we can suggest to other prospective clients."

McLellan says he diligently reports his barter income to the IRS. So does Ames of the Craftsmen Cafe. That not only keeps them on the right side of the law, it also allows them to claim tax deductions when they barter for items categorized as business expenses. For example, a caterer who barters $250 in services to a printer in exchange for $250 worth of business cards can claim a tax deduction for that amount.

For better or worse, many business owners gravitate to informal barter because the deals tend to stay off the books. It's hard for the IRS to uncover an instance of bartering if neither party reports it, says Tom Ochsenschlager, vice president of the American Institute of Certified Public Accountants in Washington, D.C. But informal barter has drawbacks. Would-be traders must locate a counterpart for each transaction. And some swaps simply don't make sense. It might be impractical to cut a $10,000 barter deal with a restaurant, for example. Would you really want all those chicken dinners? And what if the restaurant went out of business before you'd claimed your grub? By contrast, joining an online barter exchange can expand your network of trading partners and provide access to a much larger selection of goods and services.

Christian Kar is the founder of Silver Cup Coffee, a company with 16 employees and $3 million in 2008 revenues that's based in the Seattle suburb of Lynnwood. The firm distributes high-end espresso machines and also creates custom coffee blends. Its customers include indie coffeehouses, hotels and restaurants.

In recent months Kar has bartered for Web site design, a walk-in freezer, a phone system, vehicle maintenance, plumbing, catering for a company holiday party and a parking lot paint job. Kar estimates that 5% of his company's expenses are covered through barter: "Especially in such a dicey economy, I always think, 'Do I pay in cash, or should I get on the barter exchange?' "

Thanks mostly to the Internet, the U.S. currently boasts some 500 barter exchanges, up from about 40 in 1980. Kar trades through an outfit called BizXchange that's headquartered in Seattle. Here's how it works: Say a printing company uses the exchange to buy $1,000 worth of Kar's coffee. Kar will receive $1,000 worth of trade dollars that he can use to pay for any good or service offered on the exchange. He doesn't have to barter directly with the printer. In fact, if the printer goes belly-up, Kar keeps his 1,000 trade dollars. He could split up his barter purchases, buying 500 trade dollars' worth of lightbulbs and 500 in window cleaning. "An exchange is like a small closed economy with its own currency," explains David Wallach, executive director of IRTA.

Most barter exchanges charge a onetime membership fee (typically around $250) plus a monthly fee ($30 is standard). You also pay the exchange a commission of 5% to 8% on each barter transaction. The fees buy access to a broader range of barter transactions than you could structure for yourself. You also get to join an online community consisting mostly of small business owners.

Exchanges provide useful record-keeping services. All transactions are reported to the IRS, and the exchange usually furnishes members with monthly and year-end statements of their trading activity. Although most exchanges focus on particular regions, they sometimes have reciprocal arrangements with others around the country. This can be useful if you're trying to locate an obscure item, or even for business travel. Recently Kar booked trips to Toronto, Chicago and Miami through exchanges with which BizXchange has a relationship.

Whether done informally or through an exchange, bartering allows business owners to connect with customers whom they might not otherwise find. Joe Gallenberger is a case in point. Gallenberger owns Cream City Music, a store in the Milwaukee suburbs that sells new and vintage guitars. He employs eight and posted $3.5 million in revenues last year. Gallenberger often trades guitars for advertising. Last year he closed enough barter deals to purchase $50,000 worth of spots, nearly half his annual ad budget. He also cut deals for space in a Milwaukee Pennysaver and in the local edition of the Onion, a national humor publication.

Gallenberger also trades guitars for other business necessities, such as printing and plumbing. All the while, he's careful to treat barter customers with the same courtesy he extends to his cash customers. "You never know who's going to talk you up to others," he says. "Word of mouth from barter customers is just as valuable as it is from any other kind of customer."

According to Gallenberger, barter helped increase customer traffic at his store by 20% in 2008. He says about half the business came from returning barter clients and the rest from ads. He wouldn't trade that for anything.