A great way to turn barter credits into cash is to “use” your friends.  For example:  I’m a Deacon at my church and we usually go out to dinner before our monthly Deacon meeting.  I usually  try to suggest a restaurant that I can barter with and offer to pay the tab.  Sometimes they let me and the meal is “on me” however often times they will insist on giving me some money so I’ll go home with cash in my pocket.  I do the same thing with movies.  If I’m going to see a movie with some buddies, I’ll make sure I can barter for the tickets and buy them ahead of time.  Then my friends pay me cash.  The best example of this sort of thing for my family is actually something my wife does.  My kids are involved in a bunch of after-school activities that we pay for on barter.  Often times she’ll let her friends that have kids the same age know that we’re participating and they will too.  We’ll then pay for everyone on barter and collect cash from our friends.  Usually when we do this, we cut our friends a discount on the price and often that makes the difference as to whether they could participate or not.

A friend of mine that is heavy into barter had a slightly modified version of this.  He had a friend with a very sick cat that couldn’t afford treatment and was going to have to put it down.  He offered to take the cat to a vet that he could barter with, and now the friend is making cash payments to him.  Talk about a win-win!  The vet got business he wouldn’t have gotten, my friend turned his barter into cash and the cat got to live!

A word of warning that this sort of exchange doesn’t always work.  Here’s two things that I’ve run into:

1. My parents needed their tree trimmed.  I tried to hire someone on barter then have them pay me cash.  It was a good idea, but in this particular situation, the two barter tree guys that I could find were both bad choices.  One was way to expensive and the other one wanted to do a half/cash deal that was against the policy of my exchange.   Since then we’ve got a new good tree guy in our exchange so I’ll try this again next time.
2. I barter with my kid’s karate dojo and over the years we’ve recruited a number of our friends’ kids into the dojo too.  Because our friends up to this point had the cash to pay the dojo and I know that the dojo could really use the cash, I’ve never paid for my friends on barter to get the cash personally.  I’m just happy that I can barter with the dojo for my own kids and I haven’t tried to use the situation to cash convert.

I just spotted this awesome article about debt within a barter exchange over at barternewsweekly.com (no affiliation with this website).  Please check it out:

http://www.barternewsweekly.com/2011/09/02/overcoming-a-deficit-in-your-exchange-3121/

As I mentioned in my earlier post, for the next month or so I’ll be looking at ways to turn your barter habit into cash.  The most basic form of cash conversion is simply to buy things on barter that you would have purchased with cash.  The cash that you would have spent on that product or service is your effective conversion from barter to cash.

This is simple enough to do in theory, however I’ve found in practice that the vast majority of traders are really bad at this.  Here are my tips to help make sure that you take advantage of every possible barter purchase possible so you can hang on to your cash:

• For EVERY purchase, product or service, business or personal, ALWAYS see if you can buy it on barter FIRST.
• Make sure that everyone in your family or office that has the authority to make purchases is fully informed about how and why to make purchases on barter.  I doesn’t do any good for you to know all the ins and outs of barter if someone else who doesn’t understand barter makes most of the buying decisions.
• Keep an up-to date wish list of products/services that you want to purchase on barter.  Make sure that your barter exchange broker has a copy of the list and keep an eye out on CraigsList.org for these items.  Approach vendors that sell the items on your list and ask them if they are interested in bartering.
• Stay informed about new members of your barter exchange.
• Stay informed about what is available for purchase through your exchange’s online marketplace

As much as I love barter, I’d always rather have cash.  Of course I’m not the only person that feels this way.  As such, the art and science of turning barter credit into hard cash represents the holy grail of success in the barter world.  Within the industry this alchemy is known as “cash conversion.”

In the coming weeks I’m planning on writing a number of articles about cash conversion using this post to over-view the topic and whet your appetite.  Here are a few of the many ways that you can turn barter credit into cash.  Of course some methods are better than others and some people are more suited to a particular method.

• Buy items on barter that you then sell (on ebay, craigslist, etc.) for cash.
• Purchase items on barter that you would have spent cash on, and keep the cash.
• Purchase items on barter that your friends/relatives would have paid cash for and have them pay you in cash.
• Purchase services/products on barter that you can sell to your regular clients for cash.
• Purchase items on barter that you anticipate will appreciate in cash value like real estate, collectibles, commodities, etc.
• Refunds or reimbursements in cash for purchases that were made on barter.
• Purchase marketing services through barter that will attract cash clients.

I’ll post my thoughts on these different approaches in coming weeks.  In the mean  time, I’m quite sure I’ve left some other approaches off my list here.  Please use the comment area below to share some other ideas.

There are a couple reasons why barter restaurants need special care. For one thing, absolutely everyone has to eat.  That means they can potentially trade with anyone which makes them very valuable in your barter network. Also because food cost percentages are are usually around 30 percent they have significant cash costs. The last little twist to make things complicated is that you are paying their staff directly in part through your tip.

So…with all that in mind, I have a couple suggestions to keep on your favorite restaurant’s good side and hopefully keep them bartering for a long time.

1) Be nice
If there is a mix-up about when they accept barter as payment, be nice. Gracefully pay in cash and talk to the owner later. When you talk to him/her, don’t complain. Express how much you like their restaurant and that you called because you want to help their business.

2) Leave enough cash
Most resaurants need the tax and tip to be paid in cash. When I dine on barter I make a special effort as an embassador for barter to be a good tipper. In most areas tax is somewhere around 10% and a good tip is 20% so you are doing good if you leave about 30% cash.

3) Post on yelp
It’s in your best interest for your favorite restaurants to stay profitable so do what you can to help them. Besides recommending the restaurant to your friends you can also recommend it to strangers. You can do this by finding the restaurant on yelp.com and posting a glowing review. For those of you with smart phones you can download a free Yelp app to make this faster.

A few times along my journey I’ve run into potential trading partners that have gotten lost along the way and would choose to spend cash over barter for the things they need.  As much as I love barter, I’d always prefer to receive cash.  And in turn I’d always prefer to make purchases on barter and preserve my cash.  It’s not really complicated is it?

A couple times now I’ve spoken with folks who have felt that the deal really didn’t fit barter and that they would rather just pay me in cash.  And to those people I would suggest that you always say:  “YESSSSS!!!  I would be more than happy to accept your cash as payment!”  It does beg the question though…what in the world was going on in these people’s heads when they decided that it was better to pay in cash?

I think these people break into two groups:

1. People who just don’t understand barter
   I ran into this a while back with a laundry service I was talking to.  Because what I wanted from him was on-going and what he wanted from me was more of a one time thing, he didn’t feel that barter was appropriate and preferred to pay cash.  Ultimately the deal never happened.  He wasn’t motivated enough to go through with the deal on a cash basis and I could not explain barter to him well enough.  There are simply some people who WILL NEVER understand barter.  Probably it’s best to identify them early and move on.  I should do an article about that some time.
2. People who think they will get into trouble with the IRS
   I had an interesting case recently when I offered to have my company build a $7k website for a potential client on 100% barter.  One of the client’s concerns was that they wanted to write off the expense of the website and were concerned that if they did that large of a trade that they would run into tax trouble.  I told them that I would be happy to accept partial or total payment in cash, however, I also report all my barter income to the IRS and that there is absolutely no problem with their claiming a large barter expense on their taxes.  Furthermore I told them that they should definitely send me a 1099 which would back them up on the legitimacy of the expense.

So….how much barter really is too much?  Ultimately that is an indiviual question.  I’ve heard people in the industry throw out recommended percentages as rules of thumb… 5% of your total sales; 10%, 15%.  It’s nice to have a number to put out there for newbies but I really question the accuracy of any general number like that applied across the board.

First off I should point out that 99% of the traders out there that think that they can’t handle more trade are probably wrong.  It’s not that they have too much trade, it’s that they are not good enough at trade to take advantage of more trade than they are currently conducting.  I don’t mean this as an insult.  It applies to myself as well.  Right now I have more of one partcular barter currency than I need and I’ve (for the most part) stopped accepting that currency.  Does that mean that I have too much?  Maybe.  Or it could mean that I simply have not yet figured out how to use that currency to my advantage well enough.

Occasionally I hear a story about someone who supposedly lives on 90 to 95%  barter income.  Frankly I find this very difficult to believe.  As much as I love barter,  there are some things that you have to pay for in cash.  Taxes for example.  The IRS won’t take a chicken as payment.  Plus, trying to barter for absolutely everything you need would be a lot of work.  I’m not convinced that one person would have enough time to in  a normal work week to find all the trades they need to make it on 95% barter income.  I’d also point out that because setting up a trade takes a while, even if you have enough time in your week, that doesn’t help you with an immediate need you might have in the next hour.

I just checked over my records for 2010 and it looks like about 35% of my income was on trade.  I don’t know about you, but that number is a little scary to me.  I love to trade, don’t get me wrong, but it is unsettling to me that I am that dependent on barter.  It means I really need to be motivated to find good trades for things that my family needs.  If I don’t find those trades, my income goes down substantially.

Of course, it’s not like I’m decreasing my cash sales in order to take on barter sales.  All barter sales are in addition to the cash sales I was going to do anyway.  So from that point of view, the percentage doesn’t really matter.  Barter does not replace my cash slice of the pie.  It helps me have a bigger pie.

I realize it’s a somewhat personal question, but I would be very interested if folks would post back a comment on this article and let me know what percentage of their income is in barter and how they feel about that number.  Feel free to post autonomously.

There are a couple recurring concepts that I’ve run into about barter that I’d like to address.  For those of you that have been around the block, you already know these.  That being said, I hope this article will still be valuable as you can refer the uninitiated to it.

1. Barter is NOT a tax dodge
   The IRS does not mind if you barter at all.  That’s because all of your barter income is taxable.  You are expected to report all barter sales on your income taxes.  This on is a slam dunk as far as documentation goes.  Here is a direct quote from the irs.gov website:
   Topic 420 – Bartering Income
   Bartering occurs when you exchange goods or services without exchanging money. An example of bartering is a plumber doing repair work for a dentist in exchange for dental services. The fair market value of goods and services received in exchange for goods or services you provide must be included in income in the year received.
   Generally, you report this income on Form 1040, Schedule C , Profit or Loss from Business. If you failed to report this income, correct your return by filing a Form 1040X. Refer to Topic 308 for Amended Return information.
2. Barter is not illegal
   It may surprise you to hear that some folks out there actually think that bartering is illegal.  Usually this idea in some way is related to taxation.  I guess the belief is that some government agency has banned barter as a way to stop folks from skipping out on their taxes.  This is totally untrue.  Barter for any legal product or service that I’m aware of is totally legal.  What IS illegal is tax evasion.
   It’s not just income tax that can be an issue.  I once ran into a small farmer that I wanted to trade with that was convinced barter was illegal.  After asking some questions I figured out what the actual problem was.  Some years back they had traded produce for labor on their farm.  When this worker became unhappy with them they got into a lot of trouble for illegal labor practices.  The farmer failed to understand that the problem was not barter.  The problem was that this person was an employee, but they failed to follow local labor laws for this person.  It is perfectly legal to hire an employee and pay their net pay on barter, but you still have to pay state and local taxes and withholding in cash as well as have worker’s comp insurance ect. etc.
   I also find it interesting that even seasoned barter professionals often hold unfounded beliefs that certain industries are banned from barter.  I’ve been told by veteran barter professionals that industries like insurance, investment brokerages, and firearms sales all have special rules that limit or ban barter .  The problem is that every time I dig into the topic I can never find one shred of evidence either in statute or common law prohibiting or limiting barter in specific industries.  Of course I should point out that I’m not an attorney.  Please post back if you are an attorney and have some new information for our readers on this topic!

It’s important to understand these issues because part of your job as a good trader is to recruit new trading partners.  As you do that you will without a doubt run into the above objections and you need to be ready to answer them.  Of course now you can also give them a link to this article!

A great way to improve cash flow and decrease accounts receivable is to create your own barter currency.  This can be as simple as issuing gift certificates.  You might be amazed how many people you do business with might accept these as payment.  Of course this will always be easier with new vendors rather than ones that already expect cash from you.  It’s as simple as asking the person with authority if they would accept your gift certificates as payment.  Your barter exchange may also be willing to purchase gift certificates from you.

Of course, some services would be better suited than others for this type of trade.  For example, my primary business is web development.  Although the vast majority of businesses need a website, many of them already have a vendor in place and a website isn’t a consumable item that you need to re-purchase every month.  Not to worry if you are in that situation.  Here’s a cool twist on this classic concept:  You can use other people’s gift certificates as your own barter currency too.  For example.  My firm does web development with an online grocery store that specializes in organic food delivered to your home.  Because absolutely everyone has to eat, this is a perfect barter currency.  Right now I’m negotiating with a local butcher shop to build their website and I’m hoping to do the same thing with them.  My family does not need thousands of dollars worth of steak, but I sure do have a lot of friends in my barter network that would love to get their hands on some gift certificates for meat from this shop.

The one part I still have to work out is the actual certificates that will be used if I make a deal with the butcher shop.  Currently I’m thinking that I will have numbered scrip printed up for the butcher shop which each piece of scrip worth $10.  I can have them printed for the shop (on barter of course), they will pay me with them, then I will trade them away when I buy other items through my barter network.  The butcher shop is a big winner too because they will have many new customers come through their shop.  Hopefully once they spend their scrip they will come back and spend cash.

Of course I should mention that (regardless of what you use as currency) all sales need to be reported to the IRS.  Additionally, make it clear on your scrip that they are gift certificates and ARE NOT US currency.  None of us want to be talking to the secret service about counterfeiting.