Dunning Letter: Meaning & Templates to Get Paid on Time
Quentin Gaudinat
Nov 12, 2024
Late payments can disrupt cash flow and strain client relationships, making it crucial to have a clear and professional approach for collecting overdue invoices. Dunning letters are a key tool in this process, serving as formal reminders that emphasize the importance of timely payment.
By understanding when and how to use these letters, and knowing what elements to include, businesses can streamline collections while maintaining positive client relations. Keep reading to find out:
Looking to prevent late payments from escalating to the stage of sending dunning letters? Click the banner below to connect with our cash collection experts and develop a customized dunning strategy for your business.
What is a Dunning Letter?
A dunning letter or notice, is a formal written communication sent to a customer or client with an overdue or outstanding invoice. Its primary purpose is to remind the debtor of their pending payment, convey a sense of urgency, and clearly request that the balance be settled promptly. Unlike email payment reminders, dunning letters mark a more serious phase in the accounts receivable process, often issued when initial emails or phone reminders have not led to payment. This escalation highlights the importance of settling the debt to avoid potential consequences, such as penalties or legal action.
A typical Dunning Strategy
The dunning process typically begins a few days before the invoice due date with a friendly reminder, followed by another on the due date itself. After the due date has passed, initial payment reminder emails should be polite and gentle, assuming any delay might be unintentional. The goal at this stage is to encourage prompt payment while maintaining a positive customer relationship.
If there’s no response after the first overdue reminder, subsequent emails should gradually become more assertive. By the third reminder, it may be appropriate to escalate to phone calls, which allow for direct communication and quicker resolution. Phone calls also add a personal touch, signaling both the importance of the payment and the value of the relationship.
When emails and calls do not secure payment, the next step is to send formal dunning letters, which signal a heightened level of urgency and convey that further delays may lead to more serious actions.
If these efforts are unsuccessful, the final escalation involves issuing a legal notice, indicating that the debt may be pursued through legal channels if left unpaid. This step is a last resort, to be taken only after all reasonable collection attempts have been made.
Need help with getting started with your first payment reminder emails? Click on the banner to download free payment reminder email samples
Things to include in a Dunning Letter
While drafting an effective dunning letter, it’s essential to include specific details that encourage payment while maintaining a professional tone. Here’s a breakdown of key elements:
Recipient’s Information: Address the letter to the appropriate individual by including their full name, title, and company name. Adding details about your provided services or products serves as a reminder of the relationship and reinforces the value you’ve delivered.
Your Contact Information: Offer multiple ways for the recipient to get in touch. List your business address, email, and phone number to make it simple for them to resolve the payment issue or ask questions. The easier it is to contact you, the more likely they’ll address the payment promptly.
Overdue Invoice Attachments: Attach copies of all overdue invoices to provide the recipient with clear visibility into what’s owed. This should include invoice numbers, amounts, and due dates, with a summary of these details in the body of the letter. A concise list helps avoid confusion, especially if multiple invoices are outstanding.
Invoice Details and Payment Deadlines: Reference the specific invoice numbers, the total amount due, and the days past due to underscore the urgency. Reinforcing these details emphasizes missed deadlines and can motivate the client to act quickly.
Available Payment Options: Clearly list payment methods such as credit card, bank transfer, or online payment options. Make payment as easy as possible by providing direct payment links if available. The more straightforward the process, the quicker you’re likely to receive payment.
Consequences of Continued Non-Payment: Outline potential next steps if the debt remains unpaid, such as suspension of services, assignment to a collection agency, or legal action. Refer to any contractual clauses that back these actions, like late fees or penalties, while maintaining a respectful, professional tone. This demonstrates the importance of payment without damaging the client relationship.
Our Dunning Letter Templates
Using a structured, phased approach to dunning letters can significantly improve payment recovery rates while maintaining strong client relationships. Below, we provide four dunning letter templates that escalate from a friendly reminder to a final legal notice, guiding the process and helping ensure timely collection of outstanding payments.
Template #1: Gentle Reminder for Payment
The first dunning letter serves as a courteous reminder, typically sent after initial emails or phone calls haven’t resolved the overdue payment. It provides a summary of outstanding invoices, includes payment methods, and gently encourages the client to address the balance promptly.
Template #2: Notice of Impending Service Restriction
This second letter escalates the tone slightly, indicating that if payment is not made within a specified timeframe, access to services or products may be limited. The aim is to emphasize the importance of timely payment without yet taking restrictive action.
Template #3: Service Restriction and Legal Warning
At this stage, the letter informs the client of restricted access due to non-payment and includes a clear warning of potential legal consequences if payment is not made within a certain period. The tone is more direct and signals the seriousness of the matter.
Template #4: Legal Notice Due to Non-Payment
This final template is used once all previous reminders have been exhausted, and legal action has been initiated. It communicates that the debt is now in legal proceedings and urges the client to settle the outstanding balance to prevent further penalties or costs.
How to avoid the need for Dunning Letters
To prevent situations leading to the use of dunning letters, let’s look at ways to reduce late payments for your business:
Establish Clear Payment Terms:
Set precise payment terms in contracts, including due dates, payment methods, and late fees. Transparent terms help clients understand their obligations from the outset.
Use Proactive Payment Reminders:
Schedule gentle reminders before invoices are due. Using tools like Upflow to send automated reminders can keep clients informed without the need for frequent follow-ups, keeping payments top of mind.
Offer Multiple Payment Options:
Make it easy for clients by offering a range of payment methods, like bank transfers, credit cards, or online portals. Convenience can help reduce payment delays.
Incentivize Early Payments:
Encourage timely payments by offering small discounts or incentives for early settlement. This motivates clients to prioritize your invoices.
Automate Invoicing and Payment Tracking:
Implement automated systems to send invoices and track payments. Real-time tracking lets you take quick action if a payment is nearing overdue status.
Segment Clients Based on Payment Behavior:
Identify and categorize clients by their payment history, allowing you to give extra attention to clients with frequent delays and streamline communications for others.
Key Takeaways
Dunning letters play a critical role in the accounts receivable process, providing a formal means to communicate overdue payments and stress the urgency of settlement.
A phased approach—beginning with gentle reminders and gradually moving to stronger notices—helps manage collections professionally while maintaining positive client relationships.
Essential elements like client information, overdue invoice attachments, specific payment deadlines, and potential consequences make dunning letters more effective in prompting action.
Automation in payment reminders and tracking can help prevent invoices from becoming overdue, reducing the need to escalate to formal dunning letters.
Proactively setting clear payment terms, offering flexible options, and incentivizing timely payments can significantly reduce the risk of overdue invoices, enhancing cash flow stability.
Latest articles