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Tooling Amortization Strategies?

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EvanBerns
Posts: 5
Joined: Wed Nov 27, 2019 1:46 pm

Tooling Amortization Strategies?

Post by EvanBerns » Thu Jul 09, 2020 10:22 am

We are exploring a major new project and looking to potentially amortize the tooling. Would anyone be willing to share your strategy for “how” you do this? What do you do to ensure you are safeguarded in both the short and long term? What else should my team be thinking about as we pursue this new process of amortization? Thank you.

Malibu46pt
Posts: 1
Joined: Tue May 29, 2018 1:19 pm

Re: Tooling Amortization Strategies?

Post by Malibu46pt » Thu Jul 09, 2020 1:48 pm

It has been our practice to make the option to amortize tooling difficult and expensive for the customer. Regardless of the amount of dollars involved the customer needs to have some investment in the tooling before the tooling is started. We generally want 20 - 25% down. The balance can be spread over the next 1 -3 years depending on the size of the program, number of parts to be produced and the relative cost of the parts.
We charge interest at a higher rate +2% of what our borrowing rate is with our bank. We also compute the 1st years interest up front and add it to the balance owed on the tooling before calculating the piece part amortization.
It is typical that the first year production will be lower than forecast. This is why the interest is added up front. At the end of the first year any short fall of the 1st year amortization, due to not meeting the forecast, is due. Each following year the interest is added to the unpaid balance and the piece part amortization is again calculated on the new forecast. This process continues each year until the tooling is fully amortized or paid in full if the volume exceeds the forecast. In addition to filing a mold lien we ask for a personal guarantee from the principal owners of the Company.
These terms generally encourage the buyer to go directly to there bank, which is our preference. We are not in the finance business.
Good luck.
Lindsey Hahn

HRCO2040
Posts: 1
Joined: Fri Jul 31, 2020 3:10 pm

Re: Tooling Amortization Strategies?

Post by HRCO2040 » Fri Jul 31, 2020 3:18 pm

I'll add another comment to the fantastic points below.

The Tooling Amortization agreement should most have an defined end date with a balloon payment at that time for any balances due. This prevent projects from dragging out with lower volumes than the customer led you to believe were possible. I personally do not like going over 1 year from launch date on amortization if at all possible.

The risk is that you can get stuck for almost 12 months if something goes wrong during launch. I've had to experience that before, but the strong legal document upfront ensured full payment at the end despite no production ever being shipped.

EvanBerns
Posts: 5
Joined: Wed Nov 27, 2019 1:46 pm

Re: Tooling Amortization Strategies?

Post by EvanBerns » Fri Jul 31, 2020 3:33 pm

Thank you for the ideas! Much appreciate you taking the time to comment!

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