For businesses in Germany, collecting an outstanding customer bill can divert resources and create additional costs. The more outstanding bills there are, the more time and effort is required. Businesses with tens or hundreds of outstanding bills might struggle to maintain efficiency with manual dunning processes. Many opt to automate their payment reminders and dunning workflows.

In this article, we explain the dunning process, including formal requirements for an enforceable dunning letter and calculations for dunning charges and late payment interest. We also explain the differences between manual and automated dunning and how to ensure automated processes are compliant with the principles for the proper management and storage of books, records, and documents in electronic form (GoBD).

What’s in this article?

• What does dunning mean?
  
• What are the formal requirements for an enforceable dunning letter?
  
• How do businesses in Germany calculate dunning charges and late payment interest?
  
• What’s the difference between manual and automated dunning?
  
• What are the GoBD requirements for automated dunning?
  
• Automated dunning: Best practices
  

What does dunning mean?

Dunning refers to the systematic process of settling open invoices from a business’s customers. The aim is to collect outstanding payments and avoid default without putting unnecessary strain on the business relationship. Therefore, dunning is central to structured accounts receivable (AR) management.

The process starts as soon as a debtor misses the deadline for settling an invoice. Typically, a business will send out a payment reminder as an informal way of notifying the customer of the outstanding account. If this reminder does not prompt the customer to pay, the business will send out one or more dunning letters.

How the dunning process works

A dunning letter is a formal letter that urges a debtor to pay the amount due. According to Section 286 of the German Civil Code (BGB), the debtor (also known as an “obligor”) is now in default as a result of this dunning letter. However, a dunning letter is not always a prerequisite for a default payment. According to Section 286.2 of the BGB, a dunning letter is not required for a debtor to enter into payment default if a specific calendar date was agreed upon for payment. The same applies if the debtor definitively refuses to pay or if special circumstances justify immediate default of payment.

Debtors are considered in default no later than 30 days after the due date and receipt of the invoice. However, if the debtor is a private individual, this rule only applies if it was explicitly noted on the invoice. Debtors are not considered in default if they are not at fault for the delay in payment.

If invoices go unpaid despite multiple dunning letters, businesses can take further legal steps. In particular, these include initiating judicial proceedings for a payment order or bringing a debt enforcement action. Alternatively, businesses can sell their outstanding AR to a third party in a process known as factoring. This is a way of securing their short-term liquidity.

Types of dunning

Businesses in Germany organize their dunning in two ways: internally through their own accounts team or externally by hiring service providers, such as debt collection agencies or law firms. There are also differences in the ways businesses manage the organizational aspects of dunning. They can either conduct their dunning manually or via automated workflows.

What are the formal requirements for an enforceable dunning letter?

For a dunning letter to be legally enforceable, the creditor must clearly state to the debtor that it is making a claim to the payment. The law does not stipulate mandatory information that a dunning letter must contain. What matters most is that the request for payment is stated clearly and unambiguously. However, certain established practices increase legal certainty and transparency among businesses.

Clear labeling and account identification

A dunning letter must be clearly identifiable as such. Label it explicitly as a “Dunning letter” to ensure that it is clearly a formal request for payment. Reference the outstanding account in question, and indicate an invoice number or similar. This allows the recipient to match it to their records and can prevent misunderstandings. It is also a good idea to add a note that the agreed upon payment deadline has been missed and that the debtor is now in default.

Specific payment deadlines

A dunning letter should indicate both the original payment deadline and a new, concrete due date. Specify the original due date to show how long payment has been outstanding, and set a new payment deadline to establish clarity about the account settlement date. Indicating a concrete date makes it easier to enforce the debt and does not leave room for interpretation.

Transparent outline of costs

If the creditor is claiming additional costs in the dunning letter, these must be listed clearly and transparently. Additional costs could include dunning charges or late payment interest. Providing a clear overview of these costs can ensure greater legal certainty, reduce the amount of queries, and make payment demands clear to the debtor. At the end of the dunning letter, clearly indicate the total amount—which includes the original invoice total—plus any additional charges and interest.

How do businesses in Germany calculate dunning charges and late payment interest?

Businesses charge their customers dunning fees and late payment interest as a way of compensating for time spent and the negative impacts of delayed payments on business finances. In Germany, the legal basis for dunning charges and late payment interest is governed by Sections 286–288 of the BGB.

Dunning charges

Dunning charges cover the costs of materials, shipping, and processing of outstanding claims. For example, these costs can arise from mailing dunning letters or from return debits and fee-based address investigations. Personnel costs cannot be included in dunning charges because they are considered general operating costs.

The law does not precisely define the amount of dunning charges. However, they must be reasonable and cannot exceed the actual costs incurred. Courts classify excessive reminder fees as inadmissible. In practice, standard dunning charges per letter range from around €2.50–€5. Higher charges are only permissible if a business can prove that it performed a correspondingly higher amount of work.

A separate provision applies to outstanding accounts with other businesses or public bodies. This allows creditors to charge a flat rate of €40 as soon as the debtor is in default of payment. This flat fee covers the costs of legal action, regardless of the amount originally owed. If creditors wish to charge higher dunning fees, they must demonstrate that the actual damage they have suffered is greater than €40.

Late payment interest

In addition to dunning charges, companies can charge late payment interest. This serves as compensation for the fact that a company cannot use the amount owed until payment is made (e.g., for investments or interest income).

Legal regulations establish how much late payment interest a creditor can charge. The amount depends on the type of debtor. Debts owed by private individuals attract statutory interest of 5% above the base rate, which is published biannually by Germany’s central bank, the Deutsche Bundesbank. For accounts between businesses or with public bodies, statutory interest is 9% above the base rate. Late payment interest is generally calculated on a daily basis. This means the amount of interest a debtor owes depends on how many days the payment is late.

What’s the difference between manual and automated dunning?

Settling outstanding AR is one of the most time-sensitive tasks for a business. Every company must decide whether to organize its dunning manually or use automated processes. Both options have pros and cons, especially with respect to efficiency, error rate, and compliance.

Manual dunning

With manual dunning, employees in accounts or finance generate individual invoices, payment reminders, and dunning letters by hand. This approach allows for a personal touch when contacting customers and gives businesses the flexibility to make accommodations in special cases. However, it also entails significant challenges:

• Error rate: Amounts, payment deadlines, and stages of dunning can easily get mixed up, requiring corrections and potentially leading to financial losses.
  
• Time: With manual dunning, every step of the process—checking, generating, sending, and chasing invoices—has to be done individually, which can be time-consuming.
  
• Inconsistent communication: If multiple employees are responsible for managing dunning at a business, there could be differences in wording or deadlines. This can lead to confusion or conflicts with debtors.
  
• Compliance risks: Incorrect or incomplete dunning letters are considered legally ineffective, which makes it harder to enforce the debt.
  

Despite these drawbacks, some smaller businesses and startups continue to rely on manual processes while invoice volume is low and time spent is manageable.

Automated dunning

With automated dunning, software solutions handle the entire dunning process. The software identifies outstanding bills and dunning stages automatically, generates the corresponding letters, and sends them out at the right time via mail or email. By automating dunning, businesses can increase both efficiency and legal certainty.

The advantages of automated dunning include the following:

• Fewer errors: Deadlines, dunning charges, and late payment interest are calculated automatically, reducing the possibility of human error.
  
• Increased efficiency: Large volumes of outstanding bills are processed in less time.
  
• Standardization: Standardized phrasings, deadlines, and dunning stages ensure consistent communication.
  
• Better traceability: The system logs every step, so the dunning process remains transparent and audit-proof.
  
• Flexibility: The process is efficient and controllable, even as invoice volumes rise.
  
• Legal certainty: Automated dunning processes ensure compliance with legal regulations regarding deadlines, dunning stages, and late payment interest. This can significantly reduce the risk of legal challenges.
  

Decision-making factors

A business should consider several factors when deciding to work manually or automate its dunning. Key factors include the business’s invoice volume and available resources.

Businesses with only a few outstanding invoices can usually manage their dunning process manually. However, when invoice volumes increase, automated dunning becomes important for maintaining an overview and working efficiently.

Manual dunning requires properly qualified staff who can manage the entire dunning process reliably and on schedule—from checking outstanding AR to creating and sending dunning letters to tracking and documentation. Businesses also need to factor in the financial aspects. Implementing a software solution for automated dunning means investing up front in licenses and rollout. However, automation can save companies money in the long-term by enabling staff to use their time more efficiently and reducing errors and delays.

What are the GoBD requirements for automated dunning?

Businesses in Germany that use digital business processes must comply with the GoBD. It establishes requirements for how businesses must record, handle, and archive tax documentation, including payment reminders, dunning letters, and dunning records.

When German businesses automate their dunning, they must document each individual action in the dunning process in a traceable and auditable way. This guarantees that all relevant information is correctly archived and can be accessed during audits.

Documentation and access

The GoBD requires all dunning processes to be recorded chronologically and in full. This includes recording the following:

• Outgoing invoices
  
• Payment reminders
  
• Confirmation of delivery and receipt of dunning letters
  
• Changes in dunning stages or deadlines
  
• Notes on queries or agreements with debtors
  

Additionally, access to this data must be possible at any time for the purposes of financial audits. The standard retention period for tax documentation in Germany is 10 years.

Tamper-proof and auditable documentation

GoBD-compliant systems must guarantee that data cannot be amended retroactively without leaving a trace. All changes must be logged with a timestamp and the name of the person making the change. This is particularly important if software solutions generate documents or determine deadlines independently during the dunning process.

Automated dunning: Best practices

With modern software solutions such as Stripe Billing, businesses in Germany can automate their dunning without losing individualized attention to customers. The best practices below illustrate the opportunities automated dunning provides.

Automation

With Billing, businesses can manage recurring tasks, automatically identify outstanding bills, and send payment reminders or dunning letters at the right time. This helps reduce errors and allows businesses to manage large volumes of invoices. The system easily integrates into accounts and AR management, automatically reconciles incoming payments, prioritizes outstanding items, and prepares legal steps as necessary.

Personalization

Standardized payment reminders and dunning letters ensure consistency and legal certainty. It is also important to consider individual situations and add a personal note to each dunning letter. With Billing, businesses can personalize dunning letters, adjust cadences, and personalize wording for individual customers.

Intelligent retries

Billing automatically retries failed payments and chooses a time and cadence designed to maximize success. This reduces the volume of outstanding payments and shores up the business’s liquidity.

GoBD-compliant documentation

Billing logs and timestamps all actions in full. Outgoing invoices, payment reminders, dunning letters, and changes to deadlines are all securely archived and can be accessed anytime. This helps businesses fulfill their GoBD documentation and auditability requirements with confidence.

Continuous enhancement

Billing continuously analyzes key performance indicators (KPIs), such as average duration of dunning and success rate. This helps it target dunning cadences, deadlines, and communication strategies for improvement.