Late payments can be a real headache for businesses, big and small. They can disrupt cash flow, hinder growth, and strain relationships with customers. That’s where dunning letters, also known as payment reminders, come into play. In this guide, we’ll unravel the technicalities surrounding dunning letters, providing you with essential insights, tips, and even a template to make your life easier.
What is a Dunning Letter?
First things first, what exactly is a dunning letter? A dunning letter or payment reminder is a written message, often in the form of a physical letter or email, sent by a business to a customer who has overdue payments. It usually serves as a friendly nudge, reminding them of their financial obligation. These emails / letters typically start as gentle reminders and can escalate in severity if the debt remains unpaid.
What is the difference between a dunning letter and a statement of account?
A statement of account is a summary document provided to a customer on a regular basis, typically monthly. It outlines all transactions related to an account during a specific period, including invoices issued, payments received, and the current account balance. Unlike a dunning letter, a statement of account is not a direct request for payment but rather an informational document to help customers track their financial activity with a business or organisation. A handy alternative to sending out regular statements of account is the use of a personalised online customer portal. There you can give your customers not only a digital overview of all their finances related to your collaboration, but also all services connected to the invoices (e.g. in form of project status and budget reports).
How to Write a Payment Reminder (+ Template)
Now that you understand what a dunning letter is, let’s explore how to craft an effective payment reminder message. Here are a few things you have to look out for:
- Tone: A well-written dunning letter strikes a balance between assertiveness and courtesy. Make sure you are being direct and concise but also show understanding for your customers’ situation. Adjust your tone depending on the dunning level.
- Form: A payment reminder email is the most common and simple dunning method. If you offer software as a service, you can also use in-App notifications like a banner or pop-up to make sure your customer is reminded to update the payment. Posting a physical dunning letter is a fairly outdated method. But it can be sent additionally next to a final payment reminder email before taking legal actions to add a sense of urgency and seriousness to the matter.
- Dunning fees: To charge reminder fees is a common practice to give your customers an incentive to pay their debts. But make sure to check the legal regulations in your country and to charge reasonable dunning fees. The specific dunning costs can be calculated with a percentage of the outstanding amount, a flat fee or a gradual fee that gets higher from level to level in the dunning procedure.
You’ve covered all the basics and regulations? Then go on and create your payment reminder with the help of this template for a dunning letter:
Click to see template
[Your Company Letterhead]
Subject: Payment Reminder – Invoice #[Invoice Number]
Dear [Customer’s Name],
I hope this letter finds you well. We appreciate your business and value our ongoing partnership. However, we’ve noticed that there is an outstanding payment on your account for Invoice #[Invoice Number], which was due on [Due Date].
As of [Current Date], the amount of € [Outstanding Amount] remains unpaid. We kindly request your prompt attention to settle this overdue balance.
Please find the payment details below:
Invoice Number: [Invoice Number]
Invoice Date: [Invoice Date]
New Due Date: [Due Date]
Outstanding Amount: € [Outstanding Amount]
To make the payment process smoother, you can use the following methods:
- Online Payment Portal: [Provide a link if applicable]
- Bank Transfer: [Provide bank details]
Should you have any questions or concerns regarding this invoice, please do not hesitate to contact our accounts department at [Accounts Department Contact] or [Accounts Department Email].
We understand that unforeseen circumstances can affect payment timelines. If this is the case, please let us know as soon as possible so that we can work together to find a suitable solution.
We genuinely value your business and want to ensure that this issue is resolved promptly. Your immediate attention to this matter is greatly appreciated.
Thank you for your cooperation.
[Optional: name contact person]
Remember to customise this template with your specific company details, including the invoice number, due date, outstanding amount, and payment methods. Personalising the message adds a special touch and demonstrates your commitment to resolving the matter amicably.
Understanding the Dunning Process
Now that you have a payment reminder template at your disposal, let’s delve into the procedural aspects of sending payment reminders. Timing and tone are crucial in this process.
We advise you to send a very first reminder 2–3 days before due date. This is really just a short and usually automated message, in which you remind your customer that the payment is due soon. Obviously you can’t charge any dunning fees as the payment is not overdue yet, but you can already inform the customer about the available payment methods.
If your customer still fails to pay on time, you can start the dunning process. Three payment reminders are considered a standard in most countries and industries. After that you can resort to legal actions or using an external collections agency.
When to Send the First Payment Reminder
Typically, the first dunning letter is sent shortly after the payment due date has passed. A common practice is to send the first reminder within 7–10 days of the due date. At this stage, maintain a friendly tone, assuming that the late payment is unintentional. Maybe your customer just had some issues with their selected payment method or simply forgot to update their billing information after switching to a different bank or credit card. Your goal is to prompt action while preserving the client relationship.
You can already add a reasonable dunning fee, but often a simple reminder is enough.
When to Send the Second Payment Reminder
If the first reminder doesn’t yield results, it’s time for a slightly firmer approach. Send the second reminder about 14–21 days after the due date. You can already change the subject line from the gentle “payment reminder” to a more firm one like “dunning notice” or “demand notice”. Mention the previous reminder and gently emphasise the urgency of settling the balance, for example by adding dunning costs to the outstanding amount.
In some cases your customer might genuinely struggle to pay the outstanding amount due to cashflow problems. To avoid further escalation you can try to negotiate new payment terms by giving them the information of a contact person in your financial department or offer flexible payment methods. Options can be payment in instalments or adding the outstanding amount to the next invoice when you work with a subscription-based billing method.
When to Send the Final Notice
The final dunning letter is your last resort before considering legal action or debt collection. Send this letter approximately 30–60 days after the due date. Make it clear that this is your last attempt to settle the debt amicably, also by adding “final notice” or “last payment reminder” in the subject line. Include a deadline for payment and explain the consequences for non-compliance, such as legal actions or referring the matter to a collections agency.
Tips for Simplifying your Invoicing and Dunning Process
Sending dunning letters or payment reminders manually for every overdue invoice is a time-consuming task and nowadays really not necessary any more. There are easy ways to streamline the process and minimise the hassle. Here are some tips for you to make your invoice as well as dunning process easier and more efficient:
- Use Invoicing and Accounting Tools Many accounting and invoicing software solutions offer features to send automated payment reminders. These tools can send notices via email on your behalf, following a predefined schedule. They can also track when the reminder was sent and whether the recipient opened the email, providing valuable insights into your customers’ engagement.
- Use Online Customer Portals Give your customers a better overview on their finances by creating a personal customer portal that can be accessed via a secured link. Here you can list all open as well as paid invoices. Some tools like TimeChimp also give you the option to implement an approval flow for services you provided. You simply track your hours and costs for a project and your customer will receive a notification that they have to approve the registered services first before they will be added to the invoice. This way you also avoid late payments due to questions or complaints about seemingly wrong invoices.
- Implement Payment Terms and Agreements Set clear payment terms and agreements from the beginning of your business relationship and communicate them. The easiest practice is to refer to your payment terms in your general terms and conditions on your website every time you close a deal with a customer and remind them, that they are accepting those terms by closing the deal. Include due dates, late payment penalties, and interest rates for overdue payments. Having these terms in writing can deter late payments and provide a strong legal foundation if disputes arise.
- Offer Payment Plans In some cases, clients may genuinely struggle to make full payments. Consider offering payment plans that allow them to settle their debts in manageable instalments. This can help maintain the client relationship and recover the owed funds over time without losing the customer.
In the world of business, late payments are an unfortunate reality. However, with a well-structured dunning letter, sent at the right time with a friendly yet firm tone, you can improve your chances of getting paid promptly while maintaining a positive customer relationship. Communicating your payment terms and agreements, using customer portals and offering flexible payment plans can already improve your invoicing process so you don’t even have to send dunning letters in the first place. Your customers are still behind with their payments? Just automate your dunning process with a smart invoicing tool that sends automated payment reminders so you can focus on what you do best – growing your business.