Managing customer payments efficiently is a crucial part of running a successful business. Late or missed payments can disrupt cash flow, affect profitability, and create unnecessary financial strain. Two important tools that businesses use to manage receivables are statements of account and dunning letters. These tools help companies maintain transparency, remind customers of outstanding invoices, and, if necessary, escalate unpaid debts to legal action.
In this blog, we will explore why these documents are essential, the different dunning levels, and their importance when escalating overdue payments to legal collections, with a focus on key markets such as DACH (Germany, Austria, Switzerland), Italy, Spain, Portugal, UK/Ireland, and France.
What Is a Statement of Account?
A statement of account is a document that summarizes a customer’s account activity over a specific period. It typically includes:
- A list of invoices issued
- Payments received
- Any outstanding balances
- Due dates for pending payments
Businesses send statements of account regularly (e.g., monthly or quarterly) to keep customers informed of their financial obligations. Unlike invoices, which request payment for a single transaction, a statement of account provides a comprehensive overview of all transactions between the company and the customer.
Why Are Statements of Account Important?
- Transparency: Customers can clearly see their financial standing with the company.
- Prevention of Disputes: By regularly updating customers, businesses can prevent misunderstandings regarding unpaid invoices.
- Improved Cash Flow: Customers are more likely to pay on time when they receive regular reminders.
- Early Identification of Payment Issues: If a customer is consistently behind on payments, the business can address the issue proactively.
A statement of account serves as a gentle reminder before initiating a more formal approach, such as sending dunning letters.
What Is a Dunning Letter?
A dunning letter is a formal communication sent to a customer to remind them of overdue payments. Dunning letters follow a structured approach, becoming progressively firmer as the payment delay continues.
Businesses use dunning letters to encourage customers to settle their debts without immediately resorting to legal action. In many European markets, dunning processes are structured and often include multiple stages, known as dunning levels.
Why Are Dunning Letters Important?
- Encourage Timely Payments: Many customers pay as soon as they receive a reminder.
- Maintain Professionalism: A structured dunning process ensures a professional and consistent approach to collections.
- Legal Protection: Proper documentation of dunning attempts strengthens the company’s position if legal action becomes necessary.
- Customer Relationship Management: A clear and fair dunning process allows businesses to recover debts without damaging relationships.
The Different Dunning Levels
The dunning process is usually divided into multiple levels. Each level increases in urgency and potential consequences.
Level 1: Friendly Reminder
- Sent shortly after the due date (e.g., 7–14 days overdue).
- Tone: Polite and professional.
- Purpose: Remind the customer about the missed payment and encourage immediate settlement.
- Example: “We noticed your invoice [Invoice Number] due on [Due Date] is still unpaid. Please let us know if there are any issues with processing the payment.”
Level 2: First Formal Notice
- Sent 15–30 days after the due date.
- Tone: Slightly firmer but still courteous.
- Purpose: Emphasize the importance of settling the outstanding amount and warn of potential consequences.
- Example: “Your invoice [Invoice Number] remains unpaid despite our previous reminder. Kindly arrange payment within the next [Number] days to avoid late fees.”
Level 3: Urgent Demand for Payment
- Sent 30–45 days after the due date.
- Tone: Stronger, mentioning possible late fees or service suspension.
- Purpose: Warn customers that non-payment may result in penalties or legal escalation.
- Example: “Despite multiple reminders, your invoice remains unpaid. If payment is not received within [Number] days, we may take further action, including legal escalation.”
Level 4: Final Warning Before Legal Action
- Sent 45–60 days after the due date.
- Tone: Very firm, with a final deadline for payment.
- Purpose: Give one last opportunity before legal escalation.
- Example: “This is your final notice. If the outstanding amount is not settled by [Final Deadline], we will have no choice but to initiate legal proceedings.”
Legal Escalation: When Dunning Letters Are Not Enough
If a customer still refuses to pay after receiving multiple dunning letters, businesses may need to escalate the matter legally. The legal process varies by country, but common steps include:
- Debt Collection Agencies: Some businesses outsource unpaid invoices to third-party agencies specializing in debt recovery.
- Legal Demand Letter: A lawyer sends a formal demand letter warning of imminent legal action.
- Small Claims Court: For smaller amounts, businesses may take the case to a small claims court.
- Full Legal Action: In severe cases, businesses may file a lawsuit to recover the debt.
Dunning letters provide critical documentation that proves the company made multiple attempts to recover the debt before escalating legally. Courts and debt collection agencies often require proof that the debtor was given sufficient warnings.
Country-Specific Considerations
DACH Region (Germany, Austria, Switzerland)
- Businesses must follow a structured dunning process.
- Legal escalation often includes formal Mahnbescheid (court payment orders).
Italy
- Dunning letters should follow a structured format and can include registered mail for legal proof.
- Courts may require businesses to prove they made multiple attempts before escalating.
Spain & Portugal
- Pre-legal dunning is common, and many businesses work with collection agencies before legal escalation.
- Spain has a special “Monitory Process” for unpaid debts, which allows for a fast-track legal resolution.
UK & Ireland
- A Letter Before Action (LBA) is a legal requirement before court proceedings.
- Companies can use statutory demands for large debts before taking legal action.
France
- French businesses typically send mise en demeure (formal notices) before legal escalation.
- Courts often favor businesses that show a well-documented dunning process.
Statements of account and dunning letters are essential tools for managing receivables, ensuring customers pay on time, and maintaining a healthy cash flow. A structured dunning process helps businesses recover debts professionally while preserving customer relationships.
If non-payment persists, escalating to legal action becomes necessary, and having a well-documented dunning process strengthens the business’s case.
For companies operating in DACH, Italy, Spain, Portugal, UK/Ireland, and France, understanding local debt recovery laws is crucial to ensuring compliance and maximizing the chances of successful collections.
By implementing a clear and consistent approach, businesses can minimize losses, maintain strong financial health, and ensure long-term success.
