When contacting a customer in default to demand payment, there is a regulated procedure that needs to be followed. This article explains what a dunning letter is and how the dunning process works, and offers tips on how to write dunning letters correctly.
What’s in this article?
- What is a dunning letter?
- When can I send a dunning letter?
- Can I write a dunning letter myself?
- What information should a dunning letter contain?
- How should I write the first dunning letter?
- How should I write the second dunning letter?
- How should I write the third and final dunning letter?
- What interest and dunning fees should you charge?
- How can I avoid having to resort to the dunning process?
What is a dunning letter?
A dunning letter is a written payment demand sent to a debtor when an invoice has not been settled on time. Its purpose is to notify the debtor that the payment is overdue and that legal steps will be taken if the payment is not settled by a specific date.
As a business, you can send up to three dunning letters to the debtor. This extrajudicial dunning process generally encompasses three stages; however, these three stages are not mandatory. You can decide to initiate legal dunning proceedings immediately after sending the first dunning letter.
When can I send a dunning letter?
You are entitled to send a dunning letter as soon as a customer has missed the deadline for paying an invoice. However, different rules apply for dunning letters sent to individual customers compared to business customers.
Can I send a dunning letter without first sending a payment reminder?
Private customers must be notified in the initial invoice that they will fall into default following the expiration of the payment term. If you do not include this notice, then you will need to send a payment reminder before sending a dunning letter. For customers that are businesses, you can skip the payment reminder stage and send a dunning letter immediately. Business customers also fall into default automatically without the need for notice at the latest 30 days following the expiration of the payment term.
What is a payment reminder?
In contrast to a dunning letter, a payment reminder is less formal. Its aim is to inform the debtor politely that a payment is overdue. The term “payment reminder” implies that the payment has simply been forgotten. It also does not imply any pressure and is sent prior to a dunning letter. Legal proceedings against the debtor can only be introduced after sending a dunning letter, and not after sending just a payment reminder.
Can I write a dunning letter myself?
To ensure that the dunning letter meets all legal requirements, it is worth engaging a lawyer to write it. This naturally incurs costs but is advisable if the matter involves large sums. A dunning letter from a lawyer adds gravitas to a payment demand.
Of course, you can also draft a dunning letter yourself; however, you will need to take into account what a dunning letter needs to contain to ensure you are able to subsequently initiate legal proceedings.
To be on the safe side, check your dunning letter for completeness and accuracy using the list we’ve provided below. If you want to reduce your manual effort, Stripe Invoicing can be used to support your invoicing processes, such as collecting payments and settling transactions.
What information should a dunning letter contain?
A dunning letter should contain the following basic details at a minimum:
- The heading “Dunning Letter”
- The original invoice number
- Notification of late payment
- Original payment deadline (date by which the original invoice should have been settled)
- New payment deadline
- Dunning fees and late payment interest (optional)
- Outstanding amount (list any fees, interest, and the overall sum)
To see how this information can be presented in a completed dunning letter, look at our dunning letter template.
How should I write the first dunning letter?
It is important that you refer to the original invoice in the first dunning letter. This enables the recipient to clearly identify what the payment demand refers to.
Write the first dunning letter politely—in most cases customers have simply forgotten to settle the outstanding payment. Even if you assume that a customer will ignore the dunning letter, you should always remain factual and friendly. Here’s an example:
“Unfortunately, we have not been able to identify any payment settling [invoice number]. Should you have forgotten to make payment, please settle the invoice amount by [date].”
Always write it with the assumption that the customer has accidentally forgotten so you can retain their business and not turn them away.
How should I write the second dunning letter?
If the customer ignores the first dunning letter and the payment deadline expires, you can send a second dunning letter. Again, it is important to adopt factual and neutral wording. Instead of expressing annoyance, you should assume a more definite term and give notice of legal steps to be taken if payment remains outstanding. You can also charge dunning fees and interest to cover your additional costs. We explain the fees below. This shows the customer that you are now escalating the situation. The second dunning letter should have a shorter payment deadline than the first.
How should I write the third and final dunning letter?
A third dunning letter only makes sense if you believe the customer is still likely to make payment. Otherwise, you can cut short the extrajudicial dunning process and give notice of legal dunning proceedings after the second letter.
Nevertheless, if you choose to write a third and final dunning letter, you should set an even shorter deadline for payment than before (e.g., seven days). You should now also inform the customer in plain terms that the next step will be legal proceedings if the payment remains outstanding.
What interest and dunning fees should you charge?
Dunning fees and late payment interest provides compensation for losses incurred due to late payment. You can decide whether you wish to demand dunning fees and late payment interest. However, if you do, you should only add the actual material and dispatch costs for dunning letters to the invoice amount.
There is no legal regulation stipulating the amount of dunning fees. Fees of around 2.50 to 5.00 euros per dunning letter are standard. If you can demonstrate that you have incurred higher costs (e.g., having to identify an address), this can also be charged.
The fee associated with a late payment invoice is somewhat more complicated, and is regulated in section 288 of the Civil Code (BGB). You can charge late payment interest of 9% above the base rate in the case of business-to-business transactions, but only 5% is permitted in business with direct customers.
You must, however, consider two things: The base rate does not always remain constant. It is regularly reviewed by Deutsche Bundesbank and published on its website. You should ensure your charges are based on the current base rate and that late payment interest is converted each day to comply with the corresponding period (the base rate always applies “per annum,” or on an annual basis).
With business customers, you can charge a fixed charge of 40 euros by way of a dunning fee. However, the loss you incur must be greater than 40 euros.
How can I avoid having to resort to the dunning process?
Try to find out why the customer is not paying. Before initiating the dunning process, you can ask the customer whether they have misplaced the invoice or if it failed to reach their accounting department. The cause is often a misunderstanding or oversight. In most cases, it transpires that the customer has forgotten or misplaced the invoice. Direct communication is the best way to rule out such circumstances. Send the customer an informal payment reminder (by email, for example) or give them a call. Situations can often be cleared up more quickly by speaking to someone.
If this does not solve the problem and payment remains outstanding, you consider the three-phase dunning process set out above.
You might also be able to consider other subsequent steps to avoid or quickly clear up outstanding debts:
- Check the customer’s credit rating before taking orders.
- Request partial payment in advance (a down payment) for larger projects.
- Engage an external service provider (debt collection agency) to collect debts.
In any case, before the situation escalates too much, you should exhaust all options to communicate with your customers and avoid the dunning process.