In this article, we are going to explain to you exactly what dunning is, how the dunning process works and how UK businesses like yours can use dunning to recover missed payments, without having to impact the customer relationships that you've spent so long building up. It's also a vital part of keeping your accounts receivable process organised and effective.
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Late payments aren't just frustrating. They create more administrative costs, they strain customer relationships and generally waste a lot of time. Time, money and stress levels are something every small business needs to manage carefully - and that's why dunning exists.
Put simply, dunning is the process of communicating with customers to collect overdue payment. This can take a few different forms - reminder emails, formal notices and, in more extreme cases, it can involve administering late fees and escalation.
This is an incredibly important process for B2B businesses that offer goods or services upfront, while letting their customers pay later. If people are then late with their payments, your business is out of pocket, and you will have payments to make for the upkeep of your business. This causes business owners a lot of unnecessary stress.
If you manage trade credit, you need a clear, consistent dunning strategy to help protect your cash-flow, and avoid a lot of hassle. Late payments will be chased and customer relationships will be maintained.
While not all dunning processes are the same, they tend to follow a general structure. This can all be tailored to the industry, customer type, amount owed or your relationship with the customer, so it is consistent with your business.
A structured dunning process usually follows this timeline:
Every stage would be documented, tracked and tailored to your customers.
Each stage should be documented and tracked. To save time, you can use your accounting software to fully automate this - it will record the invoice status, payment history and which reminders have been sent. That way, you’ll be able to see what your situation is at a glance. Another option, for more hands-on control, is to assign a finance lead to oversee dunning and tailor the process to key customers.
A dunning letter, also known as a dunning notice, is a formal written notice that requests payment for an overdue invoice. It should clearly state how much is owed, when it was due, whether there are any late fees and what consequences will be faced if it is not paid.
The dunning letter should only be sent after you have sent other formal reminders - one or two will do - and it will mark the shift from a friendly reminder to a more official notice.
Dunning letters need to be clear, concise and professional, including all the major details and with a clear deadline for action.
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It's a difficult balance, chasing customers for money. You work hard to cultivate relationships with these people, and you want to maintain that. But at the same time, you have a business to run, and you can't afford to deal with bad debt. That simply isn’t sustainable for your business. So here are a few pointers on how to tread that precarious line:
There is an art to a successful dunning process. You don't want to come across as too aggressive, or too inconsistent, as that might prevent your customers wanting to deal with you in the future. Remember that the goal here is to recover lost revenue and keep your customers coming back (and ensure prompt payment in the future). Here are a few traps to try to avoid:
What is dunning management? A system a company employs to communicate with its customers concerning overdue payments
There's a place for automation and a place for the human touch in this process. An automated dunning process will take a lot of stress out of the situation for you, but there will be times when it is best for you to step in with some personal dunning management.
Use an automated dunning process for sending reminders, scheduling follow-ups and tracking responses. In most cases, this will be enough to get the desired outcome, and it also gives you an extra buffer from your customers, which could help you protect the relationship.
It might be better for a more human process if you have long-term or high value customers that you have a special relationship with, or if there are sensitive disputes or complaints. You may also prefer to manage the situation as a last resort, before legal action is required.
Like with any area of your business, it's important to ensure that your dunning efforts aren't going to waste with regular tracking and performance evaluation. There are a few metrics that you should focus on:
You'll be able to easily identify trends, and then you can tweak your dunning process to make them more effective.
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What is a dunning fee? Additional fees applied to a customer's account for overdue payments. They are penalties to encourage prompt payments
Businesses in the UK can apply a dunning fee to cover the cost of collecting overdue payments, but in order to do that you need to be completely transparent about it - include it in your payment terms and conditions, and make sure that they are fair and proportionate.
What are dunning levels? The stages of follow-ups - ranging from a polite reminder to a more formal process being implemented.
There is no legal requirement to apply dunning levels, but by applying them internally it will be easier to monitor various cases and see which ones need further action. They'll help you to keep on top of things, and allow your accounts receivable team to prioritise their efforts where they are needed most.
Dunning is an essential part of a B2B business. It enables you to manage trade credit and protect your company's cash flow. By having a structured, consistent and respectful process in place, you will be able to recover late or failed payments without losing valuable customers.
Whether you’re automating reminders or writing personal letters, dunning done right builds trust and boosts your bottom line.
For sellers offering flexible terms, iwocaPay’s Pay Later solution can help reduce the need for chasing late payments. You get paid upfront, while still enabling your customers to spread the cost. A better deal for them, and less risk for you.
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