“To Barter or Not to Barter: In-kind Services”

Using in-kind trade preserves your working capital while you obtain goods or services that you otherwise might not be able to afford.

In-kind trade — also called trade-outs, barter, countertrade, or contra agreements — refers to the exchange of products or services with another business wholly or partially in lieu of cash. Ideally, it allows you to use excess resources and the fair retail mark-up on your product to operate some function(s) of your business. Contra agreements are similar to the arrangements you find in an organized barter exchange, except that you do not pay transaction fees. Moreover, the entire trade is done in-kind — as opposed to the 50% cash-50% trade basis used by many barter companies. You can also participate in in-kind trade in communities where barter companies do not operate.

Countertrade agreements are especially common in international trade. This Quick-Read focuses more on local bartering arrangements.

In this Quick-Read you will find:

• Points to consider if you’re thinking of using in-kind trade in your business.
• How to secure good trade partners.
• Trade etiquette.

SOLUTION [top]

In-kind trade arrangements can be used to fulfill the needs of fundamental operations or to acquire expendable items, such as:

• Office supplies: coffee, printer toner cartridges, decoration and repairs.
• Marketing: business cards, print ads, trade-show booth space.
• Communications: Internet access, cellular phones.
• Staff incentives: event tickets, restaurant gift certificates.
• Community involvement: youth sports team sponsorship, charity event donations.

Bartering provides little or no tax benefit. Both parties report the trade transaction as if it were an income-producing sale. The benefit you derive must be from reducing undesired inventory or getting something you need when you or your trading partner is short on cash.

Tips for Trading

1. Don’t trade your junk. You aren’t looking for junk from other companies, and they aren’t looking for your rejects either. Save those for an auction. Your product should be something that other businesses want.
2. Trading isn’t about getting bargains. You trade based on the retail price of your product. Trading lets you get other goods and services without using your cash. It also lets you reduce your excess inventory.
3. You’ll want to offer your product without placing too many restrictions on your trade partner. Limitations, such as making your product available during off-peak times only, will make the agreement less attractive. Keep to the standard terms of service you use for paying customers whenever possible. Your purchasing agent and marketer(s) will have to work together to negotiate quantities and timing with your trading partner.

What to Look for in a Trade Partner

1. Be certain that you can make good use of the product being offered to you; otherwise you will be wasting your time and resources.
2. Do not overlook quality control simply because there is no cash exchanging hands. Perform reference checks with your potential trade partner just as you would in the case of any other company with which you mean to do business.
3. Your contact from the other company must be committed to your arrangement and readily available to discuss any issues that may arise. This element is particularly important should your partner-company receive its share of the trade up-front, while you have still to redeem your portion. If your potential trade partner does not return your calls in the negotiation stage, it may be an indicator of how the relationship will play out in the future.

How to Make the Most of Your Trade

The best way to ensure your trade works for you is to document it. In particular:

• Specify the retail value of the products being exchanged.
• Record any restrictions or conditions.
• Make the agreement an annual term, giving both parties the opportunity to re-evaluate the arrangement after one year.
• Have both parties sign the document, as you would any service contract.

Trade Etiquette

1. Do not approach a business from which you are currently purchasing services. It is inappropriate to ask a business to accept trade instead of the cash that they are already receiving.
2. However, it is acceptable to approach your existing customers about trade-outs. They may be pleased to get your service in trade rather than for cash. (For your own part, consider carefully whether such a trade will be of greater benefit to you than the existing revenue stream.)
3. Do not overinflate the cost of your product for in-kind trade agreements. Use the advertised retail cost, or less, for agreements.
4. If you decide to cancel your arrangement early, honor any outstanding balance. Provide adequate time for your trade partner to obtain the same value from your product as you have already received from his or hers. It is acceptable to specify an expiration date on unused trade product.
5. Likewise, if your product is a key operations function of your trade partner’s business and you opt to cancel your agreement, give your partner sufficient notice. She or he will need to make replacement arrangements.

REAL-LIFE EXAMPLE [top]

"We look for contra arrangements with companies whose products or services we are in need of and would otherwise purchase, or products and services that we would not otherwise be able to purchase because of budgetary constraints," explains Heather Fulcher, marketing manager for Axion Internet Communications.

For example, Axion needed updated marketing collateral, an essential element of marketing but one that could easily dominate much of the department’s limited budget. At that time, Axion hosted the Web site and provided dial-up access to a local print shop business. Fulcher approached the owner about doing an in-kind trade: printing the Axion brochures in exchange for free Internet services up to the equivalent value of the print job. The regular retail price of printing the material was equivalent to the retail price of Web-site hosting and dial-up access for 15 months. The owner readily accepted the offer because it would save his company the hard cash expenditure on a crucial service to which they already subscribed. For Axion, the hard cost of providing the hosting and access was a fraction of the retail price of printing the brochures.

"Axion likes to get involved in the community, sponsoring charities or special events," continues Fulcher. "Trade also allows Axion the luxury of making donations to multiple causes whereas it may not be possible with straight cash. It includes a philanthropic aspect, in return for public recognition for community support." Axion donates Internet services, such as e-mail accounts and Web-site hosting, to charities, such as the Canadian Cancer Society, that, like any other company in the 21st century, need Internet services to carry out their businesses. Alternatively, Axion will donate free Internet access packages to be given away as door prizes or to be used in silent auctions at fund-raising events. It is also worth noting that, depending on the organization, your company
may also be entitled to a charitable donation receipt for tax purposes for in-kind donations.

"The ideal type of arrangement is one in which our hard measurable cost of providing service is small and the value of goods or services we receive in exchange is significant. A good arrangement is one in which providing service to the contra partner is simply using up available capacity and there are no extra out-of-pocket costs."

Fulcher cautions others to ensure that the products received in a trade arrangement are in the best interest of your business. "There may be a tendency to be frivolous when trading services because the goods you receive are perceived of as free."

DO IT [top]

1. Make a list of products that you need but cannot afford or are unwilling to purchase with cash.
2. Create a list of potential trade partners:
   • business associates
   • companies listed in your local business directory
   • existing customers
   • members of local barter exchanges
3. Attempt to gather service references before approaching any company. This proactive approach can save you time in the long run.
4. When you make initial contact, ask to speak with the owner or president. General staff may be unfamiliar with their company’s policy on contra agreements.
5. Discuss the terms and any restrictions. Obtain independently the advertised retail prices of your potential trade partner to confirm whether you are getting a fair deal.
6. Document the agreement: each partner should keep a copy on file.
7. Inform your staff. While your trade partner should be treated like a regular customer, you want to make certain she or he is not being invoiced. It is also helpful for your staff to know that your company will consider these arrangements.
8. Re-evaluate the agreement annually. Do not maintain an agreement that is not beneficial to your business.

RESOURCES [top]

Books

101 Ways to Grow Your Business with Barter: A Guide to Thriving in the 90’s and Beyond by Kirk Whisler and Jim Sullivan (WPR, 1996).

Internet Sites

What Are the Benefits of Trading? New England Trade.

National Association of Trade Exchanges

Unreported Barter Can Get You into Trouble, by Eva Rosenberg. Taxmama.com, 1998.

"Kinds of Income," in Chapter 5, "Business Income" of Publication 334: "Tax Guide for Small Business."

Article Contributors

Writer: Tracy MacNicoll