3. The dunning procedure

A customer who does not pay receives not a single letter from you, but a series of steps. Each step is heavier than the previous one, with its own deadline, its own tone and its own consequence. If that series is set out in advance, you do not have to work out again for each customer what you are going to do, and the customer knows where they stand.

The escalation ladder

An escalation ladder is the fixed, predetermined sequence of actions you take as soon as an invoice passes its due date. Each rung has three features: a moment at which it takes effect, a tone in which you communicate and a consequence that you announce.

The classic ladder runs from light to heavy and has four steps. The first is the payment reminder: a neutral message shortly after the due date, without reproach, without costs and without any threat. The second is telephone contact, around day ten: a conversation yields information that a letter never provides. The third is the demand for payment, the written step in which you state a specific final date and announce what will happen after that. The fourth is the final demand, the last written step before handover, in which you tie a final deadline to an explicit consequence. What comes after that falls outside your own organisation: the file then goes to an external party.

The tone follows the steps: from friendly through businesslike to formal. But it is the tone that hardens, not the respect. As soon as a letter becomes accusatory, you lose the customer as someone to talk to and you do not gain a single day.

Three principles that make the ladder work

Predictability comes first. Customers soon learn what your organisation does about late payment. If you ring one customer on day ten and another only after six weeks, both will conclude that with you it isn't all that serious.

Rhythm is the second. The gap between two rungs is between seven and fourteen days. Shorter intervals come across as pushy, longer ones signal that your previous message was empty. You do not skip rungs and you do not repeat them endlessly.

Recording is the third. You record each step in the last-action field on the aged receivables list, with the date, channel and outcome. Without that note, the next colleague starts climbing again from step one.

The payment reminder

The payment reminder is the first message you send after the due date, with the sole purpose of drawing the customer's attention to an outstanding invoice. It is not a demand for payment and not a notice of default: you set no new deadline, you announce no costs, and your wording assumes that nothing is wrong.

That assumption is usually justified. A large proportion of late payments does not stem from unwillingness or a lack of money, but from a faltering route: the invoice ended up in the wrong mailbox, the purchase order number was missing, the payment run takes place once a month. A friendly reminder with the invoice attached resolves that kind of problem in one go.

Three to five working days after the due date is the right moment. If you wait two weeks, the invoice has by then fallen into the next payment window and you lose a whole cycle. If you send it the day after the due date, you catch the customers who paid that very morning. Email is the standard channel, with the original invoice attached and a payment link in the text. Address the message to the contact in the accounts payable department, not to your account manager's contact. That saves a few days on average.

From demand for payment to final demand

The reminder is friendly and non-committal. If payment still fails to arrive, your tone becomes more businesslike and your deadline shorter. Each subsequent step adds something: a firmer deadline, an explicit consequence, or an amount that increases.

A demand for payment is the second written step. You establish that the payment term has expired, you give a specific final date and you state what will happen if that date also passes. Where the reminder still assumes an oversight, the demand for payment assumes an obligation. You send it roughly seven to ten working days after the reminder, so around day fourteen after the due date. It should contain four elements:

• A statement of fact. Invoice number, amount, due date and the number of days the invoice has been outstanding.
• A specific deadline. A date, not a period. "By 14 May at the latest" works better than "within fourteen days", because the customer then does not have to do the sums.
• An announced consequence. Interest, collection costs or a credit stop. Only mention consequences that are set out in your credit policy and that you actually carry out.
• A personal signature. Name, job title and direct telephone number. A letter from "the finance department" does not invite contact.

If you phrase the deadline as a final reasonable opportunity to pay after all, the reminder also serves as a notice of default. That is precisely the moment at which the door to interest and extrajudicial collection costs opens.

A final demand is the last written step you take yourself: you demand payment within a short period, usually five to seven days, and you make it clear that the file will then be handed over. The amount is complete: principal sum, interest due and collection costs on separate lines one below the other. A final demand is not just another reminder in stronger words; the difference lies in its finality. You announce what you are actually going to do, and when.

Building up standard texts

Standard texts ensure that every debtor receives the same message, regardless of who sends it. They save time, they prevent sloppiness and they make your escalation ladder easy to follow. A workable template consists of fixed text and merge fields: you write the fixed text once and have it checked, and your system pulls the merge fields from the list of outstanding items. This is how you build up the set:

• Choose your steps: reminder, formal reminder and final demand, plus a separate variant for a disputed invoice.
• Write one version of each step for business customers and one for consumers, because the rules on costs differ.
• Put only one requested action in each text. Two requests in one letter lead to zero actions.
• Replace all amounts and dates with merge fields, so that nobody has to type them in by hand.
• Have the demand letter and the final demand reviewed by someone with legal knowledge of your terms and conditions.
• Note the version number and date in the footer, so that you can see later which text a customer received.

Summary

• The escalation ladder runs from a payment reminder via telephone contact and a demand letter to a final demand, with ever shorter deadlines and an increasingly businesslike tone.
• Predictability, rhythm and recording make the ladder effective: fixed moments, seven to fourteen days between them, and every step noted on the file.
• The reminder assumes an oversight and you send it three to five working days after the due date, to the accounts payable department.
• The demand for payment sets a firm date and announces consequences that you actually follow through on. Formulated as a final reasonable deadline, it also serves as a notice of default.
• The final demand is the last step you take yourself: a short deadline, the amount broken down into principal, interest and costs, and then handover.
• Standard texts with fixed blocks and merge fields keep your letters consistent and quick to send. One requested action per letter.
• Which deadlines, interest and costs apply in your case depends on your terms and conditions and on the type of customer. Have those texts checked legally.