THE BLOG
11/30/2012 05:48 pm ET Updated Jan 30, 2013

Starting a Business? Help Save Your Cash and Try Bartering

For Women & Co. by Mercedes Cardona, OMHCommunications.com

Launching a business demands a lot from you -- especially the need for start-up cash, a big hurdle for many entrepreneurs. But you can slow the drain on your start-up budget by trading goods and services with other businesses. There are over 400,000 companies dealing in $12 billion worth of barter worldwide, according to the International Reciprocal Trade Association.

"Sometimes being undercapitalized forces you to be more creative," says Michael Houlihan, a consultant to entrepreneurs. He used barter when he and his partner, Bonnie Harvey, founded the winery Barefoot Cellars in a laundry room back in 1986. (They sold the company to E&J Gallo in 2005.) For one, they initially bartered for a printer's work, then later switched to paying in cash.

In this way, bartering is not only a good way to balance your books, but it also helps build relationships with other businesses, says Houlihan. Trading with other businesses can show them your start-up can deliver, so your partners can eventually become cash customers or suppliers willing to give you credit, he notes.

"You're more likely to stay loyal with them because you established that relationship with barter first," says Houlihan, author of upcoming book The Barefoot Spirit: How Hardship, Hustle, and Heart Built a Bestselling Wine.

There are generally two ways to do barter: one-on-one -- think of an accountant trading tax preparation with a contractor to paint her office -- or via barter exchanges. The exchanges work as a clearinghouse where participants trade their goods and services for credits they can redeem for other members'. The IRTA, the trade association for exchanges, keeps a member directory online.

Exchanges can be a networking tool, as well, Houlihan points out: "We found the people involved in barter exchanges were like us," he says. "They were new and starting out, too."

Here are a few tips from the experts, if you're thinking of bartering for your business:

Check the details.
Exchanges are useful if you can't find a one-on-one local partner, but the Better Business Bureau recommends you read the fine print before you join a barter network. Find out what administrative fees or charges are included. The BBB has an explainer on its website with the basics on bartering for small businesses.

The BBB also recommends you evaluate what you need and see how it matches with what the exchange has available. And if you're doing one-on-one barter, make sure it's a business you trust.

Check the laws.
Houlihan says he's not sure that the barters with wine he did while launching Barefoot Cellars in the 80's are even legal anymore. But he has a point: Keep an eye out for laws and changing regulations. "You want to check with your state laws and make sure you're in compliance," he says. "You have to remember it's considered currency as far as the tax people are concerned."

Check your records.
Uncle Sam considers bartering to be a business transaction. You will have to account for it in your taxes.

The Internal Revenue Service has a Bartering Tax Center page with information on the tax issues around bartering for small businesses. It has explanations of what forms you will need to file with your return, and what records you should keep. And to make things simpler, the IRS also has a video explaining the basics of bartering for small businesses.

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