Escalating payment reminders: how to build a dunning policy

Decide the steps before any invoice is late. A dunning policy is a short written schedule: a courtesy note before the due date, a reminder just after it, a firmer reminder, a phone call, then a final notice. Apply it to every customer the same way.

Without a policy, chasing late payments depends on mood and memory. One customer gets three reminders in a week, another gets none for two months, and the awkward call never happens. A written policy takes the emotion out of it: the next step is simply the next step, for everyone.

A sample escalation schedule

Step	When	Channel	Tone	What it says
Courtesy note	A few days before the due date	Email	Friendly	The invoice is due soon; here is a copy
Reminder	A few days after the due date	Email	Friendly, clear	The invoice is overdue; please pay, or reply if something is wrong
Firm reminder	About two weeks overdue	Email or letter	Firm	Payment is now late; please pay by a stated date
Phone call	About three weeks overdue	Phone	Direct, polite	What is holding the payment up, and when will it arrive?
Final notice	About a month overdue	Letter and email	Formal	The next action and its date, including any late interest

Adjust the timing to your payment terms and your customers. Shorter terms call for a tighter schedule; long-standing clients may warrant a call earlier, not later. What matters is that the schedule is written down and used.

Tone at each level

Many late payments are not refusals. The invoice went to the wrong inbox, a purchase order number was missing, or someone was away. Early reminders should assume good faith and make paying easy.

• Early steps: attach the invoice, state the amount and due date, and include the payment details and reference. Ask whether anything is wrong with the invoice.
• Middle steps: state that the invoice is overdue, give a specific date for payment, and name a person to contact.
• Final notice: state the facts, the amount outstanding, the next action and when it will happen. Keep it formal and free of threats you will not carry out.

For wording at each level, see the guide to writing a polite payment reminder.

Late interest and fees: what the law generally allows

Late-payment rules depend on where you and your customer are, and whether the customer is a business or a consumer. A few reference points, hedged because national law differs:

• European Union. The Late Payment Directive (2011/7/EU) gives businesses a right to statutory interest on late business-to-business payments, generally set at a reference rate plus at least eight percentage points, plus a fixed minimum compensation for recovery costs. Contractual payment periods between businesses generally may not exceed 60 days unless expressly agreed and not grossly unfair. Member states implement the Directive in their own law, so the details vary by country.
• United Kingdom. The UK has its own statute on interest for late commercial payments.
• United States. Late fees and interest generally depend on the contract and on state law, so they belong in your terms before the invoice is sent.
• Consumers. Rules for collecting from consumers are generally stricter than between businesses.

Whatever applies, put your payment terms and late-payment terms on the invoice itself. The invoice checklist covers what to include. When in doubt, ask an accountant or lawyer in your country before charging interest.

Exceptions and pauses

A policy needs a few written exceptions, or people will invent their own:

• Disputed invoices. Pause reminders on the disputed amount while it is being resolved, and chase the undisputed part as usual.
• Agreed payment plans. Pause the schedule while the plan is kept; resume it if a payment is missed.
• Key accounts. Decide who may hold a reminder for a large client, and for how long. Write the reason in the customer record.
• Partial payments. Acknowledge the payment and continue the schedule for the balance.

When to stop chasing

The last step of the policy should be a decision, not another reminder. Options include stopping further work or deliveries until the account is settled, passing the debt to a collection service, a formal demand or a small-claims procedure, or writing it off. Set a threshold for each: below a certain balance, legal action can cost more than it recovers.

Record every step on the customer record: what was sent, when, by whom, and what the customer said. If a dispute reaches a lawyer or a court, that history matters.

Fewer late invoices to begin with

The cheapest reminder is the one you never send. Clear invoices with a payment reference, short terms agreed up front and an easy way to pay all reduce how often the policy runs. For recurring customers, a SEPA Direct Debit mandate collects on the due date, which leaves far less to chase; the guide to SEPA Direct Debit for small businesses explains how mandates work. More habits are in practical ways to get paid faster.

Frequently asked questions

What is a dunning letter?

A dunning letter is a formal reminder that an invoice is overdue. The term usually refers to the later, firmer steps of a reminder sequence, often ending with a final notice that names the next action.

How many payment reminders should I send before taking action?

Many businesses use five contacts over about a month: a courtesy note before the due date, a reminder just after it, a firmer reminder, a phone call and a final notice. Fewer steps can work for short terms; more rarely helps.

Can I charge interest on a late invoice?

Often yes, between businesses, but it depends on the law that applies and on your terms. In the EU, the Late Payment Directive generally gives businesses a right to statutory interest on late business-to-business payments. Elsewhere, put interest terms in the contract and the invoice.

Should I stop working for a client who pays late?

Many businesses pause new work once an account passes a set number of days overdue. Put that rule in your terms and in your dunning policy, so it is a known consequence rather than a surprise.