I'm often asked by cash-strapped entrepreneurs whether they could "pay" me
through barter--exchanging my legal services for whatever it is they offer. And
there's always a rags-to-riches tale that can be told where the young business
owner got her start because she was able to procure desperately needed services
without an outlay of cash. But does barter make sense in every case, especially
for your business? The short answer is, it depends.
Barter can take several different forms. First, it can be a direct swap of
services or products. However, both participants must be honest about the value
of their services and be prepared to swap accordingly. Like a cash transaction
that's not put in writing--and many barter relationships aren't--if the other
person doesn't follow through, your recourses are limited. The lack of clear
terms can be a problem.
As a young lawyer, I bartered legal services for tech support services from
"Jeff," a business owner in my leads group. I had tech support needs and used
his services, but Jeff kept putting off the legal work I was to do for him. When
he needed money, Jeff unilaterally canceled the arrangement and demanded that I
pay him cash for the balance immediately. That was an unpleasant surprise.
There are other options, though. There are barter clubs that have a system of
trade credits so you can spend your "barter dollars" within the community. This
helps ensure that the barter participants stay in balance. It can also introduce
you to a larger community of those willing to barter. But it also often means
that you have to pay a membership fee. After all, someone has to keep track of
all of the entries.
It's important to look into these clubs carefully. The IRS audited a number
of barter clubs in the late '70s and early '80s because they weren't keeping
proper track of credits. Also be sure to ask about the number of exchanges
actually made, as some of the clubs are more interested in selling memberships
than serving their members.
Finally, for larger transactions, there are barter companies that keep their
own databases of businesses willing to barter. Exchanges can involve three or
more participants, which is why it's helpful to have a professional in the mix
ensuring that the trades are mutual and fair. For example, a computer company
might want ad space in a magazine. The magazine might need rental cars for its
reporters on assignment. In turn, the rental car company might want to give a
premium to its larger customers by giving them computers. To work with barter
companies, it's important that your business show a good profit margin. Also
note that barter companies receive a commission on the transaction, sometimes in
the form of cash, stock options or goods.
So how can you determine if barter would work for your business? Ask yourself
the following:
Do I really have a need for the product or service being offered or is it
just nice to have? I was asked by a brand-new bakery to barter cakes for my
legal services. I happen to love cake, but I don't need it in the quantities
that would be exchanged.
Do you feel good about the product or service being offered Who's asking
you to barter? Is it a fledgling company with no track record? Would you feel
comfortable taking a gamble on whether you'll be satisfied with the product or
service or whether they'll be in business in six months?
Does the transaction make financial sense for you? Especially for services
exchanges, what does an hour of your time really cost you? How much of a profit
do you make?
Are you detail-oriented enough to do the recordkeeping? If this'll be an
ongoing relationship, are you prepared to keep track of what's given and
received--and its dollar value?
If you're using a barter club or company, have you checked the company's
background? Have there been any recent lawsuits from disgruntled customers? Any
government investigations? Are there others in the club who offer what you do?
If not, is that a good thing (little competition) or a bad thing (little
opportunity for exchange)?
Is your barter partner willing to put the arrangement in writing? Even if
no money is changing hands, remember that you're exchanging things of value. How
long will the arrangement go on? Will you have the right to demand cash at any
point? At what point can you stop providing if the other hasn't been giving?
Protect your investment in the barter opportunity just as you'd protect your
right to get paid under any other contract.
Nina Kaufman has a New York City-based boutique law practice that focuses on women-owned businesses, and is the president of Wise Counsel Press LLC, which produces legal information products for entrepreneurs. She also writes the Making It Legal blog.
This column is for your general information only. Be sure to consult with an attorney regarding your particular situation to make sure you get the advice you need.