The Dunning Process in B2B: How does it work?
Do you need to send a dunning notice to a business customer? Although this is not a pleasant task to do as this means one of your customers is not paying on time, we're here to assist you in this process with a step-by-step guide on the basics of dunning.
This is what you'll find in this article:
The definition of dunning
What is the difference between dunning and a payment reminder?
When should you write a dunning notice?
Do you even need to write a dunning notice?
Due dates, dunning fees, and interest
Structure of the dunning system
Structure of a professional dunning notice
Definition of dunning
A dunning notice is a request for the payment of an invoice that has not been paid and is beyond the payment deadline, resulting in the debtor being legally in default.
The German Federal Court of Justice defined the term dunning in a ruling as follows:
What is the difference between dunning and a payment reminder?
As a rule, a dunning notice is preceded by a payment reminder. In a payment reminder, the creditor (i.e., you, who is waiting for your money) kindly points out the missed payment to the debtor (your customer who has defaulted). However, this does not mean that the customer is legally in default.
When should you write a dunning notice?
You write a dunning notice when your customer has defaulted on a payment. That is, if the customer has exceeded the payment term of an open invoice (for this reason, it is crucial that you always note the payment term on your invoices).
Customers can miss a payment for several reasons, and the intention is not always malicious. The invoice may have been lost in the mail, or they could have forgotten to pay. Additionally, Your customer could be unable to pay due to cash flow difficulties. And in some exceptional cases, fraud could be the cause. Regardless of the reason, late payments are a problem for you. The growth of small and medium-sized enterprises (SMEs) is particularly affected by liquidity bottlenecks—and their existence is even threatened in some cases. A 2022 study by ibi on online payment processes (DE) shows the biggest challenges facing businesses are a result of non-payments. Considering these risks, you should definitely write dunning notices when payment terms are exceeded.
Your client is not paying their invoice? This is what you can do
Do you have to write a dunning notice?
Short answer–No. You are not legally obliged to send a dunning notice if the payment term was clearly stated on the invoice, the debtor is aware of said due date, and still didn't pay. In this case, you can immediately sue for payment of the purchase price.
In most cases, however, such an action is preceded by a dunning process. After all, an invoice can sometimes be lost in the mail, and there is no malicious intent behind the overdue payment. The dunning process is a shorter, less costly procedure to resolve the problem and receive remittance for your goods or services.
Additionally, you are, in all likelihood, interested in maintaining a good relationship with your customers and potentially acquiring repeat business. For this purpose, it is advisable to initiate a lawsuit only as a last resort if the dunning process has brought no results.
Due dates, dunning fees, and interest
If your customer defaults on a payment and you subsequently send a dunning notice, you also have the right to claim a fee for the dunning notices. How high this may be is not precisely defined by law in Germany. However, it may only cover the costs of the dunning notice itself, i.e., paper, printing, and dispatch. Thus, the fee is usually between one and four euros. So-called general costs, such as personnel or electricity, may not be included in the dunning fee.
You may start to collect dunning fees from the due date or payment date of the invoice.
As a creditor, you can charge interest against the debtor in case of late payment—starting from the first day of delay. The permissible interest rate is set by law and amounts to five percent per annum for companies. Details of the legal basis for interest on arrears can be found under Section 288 of the German Civil Code (DE).
Structure of the dunning system
The deadlines and number of steps in the dunning process are not specified by law, so a three-stage dunning process has become established among companies. The three stages take the form of a payment reminder, then subsequent warnings. First, a payment reminder is sent, followed by a first and second warning. If the payment reminder and warnings have been ignored and the invoice remains unpaid, the case is usually handed over to a debt collection agency.
You can read the typical three-stage dunning process in detail below:
Payment reminder
If your customer has not paid by the agreed payment deadline, a friendly payment reminder is sent—it is possible they have simply forgotten to pay. Therefore, with the payment reminder, only point out to the debtor that the debt still has to be paid.
If your customer still doesn’t pay after a payment reminder, there are no legal consequences.
First warning
If your customer still does not pay despite receiving a payment reminder, it is time to send the first warning. With this warning, you demand dunning fees from the debtor. Additionally, default interest (discussed previously) starts with this warning.
Second warning
If your customer has also failed to meet the payment deadline of the first warning, a second warning will follow. As this is the second warning, you can reduce the payment term to be shorter than the first, after all, your liquidity plus the well-being of your company depends on it. Otherwise, the second warning is structured the same way as the first one.
Judicial dunning procedure or debt collection
If the debt is still not paid after the second warning, it makes sense to hand the case over to a debt collection agency. Debt collection agencies, or collection agencies, are companies that help creditors receive missed payments.
If the previous reminders and warnings have had no effect, you should initiate a legal dunning process. Theoretically, you can start this earlier, but it is customary to send at least two warnings before the legal dunning process. To initiate a legal dunning process, you must have sent at least one dunning notice with a payment deadline that has not been met or where the initial payment deadline has been exceeded by at least 30 days. You can find the requirements for a legal dunning process in detail here.
Structure of a professional dunning letter
In order for a dunning notice to be legally valid, it must contain certain components–similar to an invoice.
Your dunning notice must contain the following:
A clear “warning”
Invoice number and total of the original invoice
Reason for claim
Dunning fees
Default interest
Payment term
Name, address, and company name of the debtor
Name, address, and company name of the creditor
Creditor bank details
Alternative: Outsource the dunning process
Of course, whether you want to take care of the dunning process yourself or hand this task over to a third party is your decision. However, outsourcing this process will save time and effort, which you can invest in other areas.
Integrating Billie's B2B payment solutions means processes like payment reminders, dunning, and default protection will be covered. If you want to find out more, write us at info@billie.io—or talk directly to our B2B payment experts: