What Is Dunning and How Does It Help Collect Overdue Payments?
Mark Harris
Relationship Manager · Oct 27, 2024 · 7 min read
Dunning is the process of systematically contacting customers to collect overdue payments. The word comes from the 17th century English term 'dun', meaning to make persistent demands for payment. In modern business, dunning refers to the structured sequence of communications, from polite reminders through to formal demands and legal action, that a business uses to recover money owed. Effective dunning is one of the most important credit control practices an SME can adopt.
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The stages of dunning
Most dunning processes follow a defined escalation path. The first stage is a payment reminder, sent one to three days before or immediately after the invoice due date. This is typically a polite email or automated message confirming the amount due and payment details. Many overdue invoices are resolved at this stage: the invoice was overlooked, the payment run was missed, or there was an internal approval delay.
If the first reminder produces no response, a second follow-up is sent, usually seven to ten days after the due date. The tone remains professional but the language becomes more direct: the invoice is overdue, further delay may affect the business relationship, and a specific response is requested. A third communication, typically sent at 14 to 21 days overdue, increases urgency and may reference the possibility of escalation. A formal final demand letter follows, usually at 30 days overdue, stating that legal action or referral to a collections agency will follow if payment is not received by a specified date.
How automated dunning works
Accounting software such as Xero, QuickBooks, and Sage includes built-in dunning functionality that automates the reminder sequence based on invoice due dates. The system tracks each invoice, triggers the appropriate communication at each stage, and logs responses. This removes the administrative burden from staff and ensures consistency: every overdue invoice receives the same treatment regardless of how busy the accounts team is.
Automated dunning sequences can be customised by customer segment. A long-standing customer with a strong payment history might receive a softer sequence than a new customer on shorter payment terms. Some businesses configure different sequences by invoice value: a £500 invoice might go through three automated reminders before a human picks up the phone, while a £50,000 invoice triggers a personal call at day seven.
"An invoice left unpaid for 90 days is three times more likely to become a bad debt than one followed up consistently from day one. A dunning process is not about being aggressive; it is about being consistent."
- Mark Harris, Relationship Manager
Dunning vs legal action and debt collection
Dunning is a credit control process that operates before legal action. If dunning fails to recover a debt, the options are formal legal proceedings (typically a Letter Before Action followed by a County Court Claim) or referral to a commercial debt collection agency. Debt collection agencies charge a percentage of the recovered amount, typically 10% to 25%. Legal action costs time and money and may not be proportionate for smaller debts.
The goal of an effective dunning process is to recover payment without reaching this point. Businesses with high-quality dunning processes collect the majority of overdue debts within 30 days of the due date. Those without a process, or with inconsistent follow-up, often find debts ageing well beyond 60 days, creating pressure on cash flow and increasing the risk of bad debt.
Invoice finance as an alternative to dunning
For businesses where late payment is a persistent structural problem rather than an occasional exception, invoice finance offers an alternative approach. Rather than waiting for customers to pay and chasing those who do not, an invoice finance facility advances up to 90% of the invoice value within 24 hours of raising the invoice. The finance provider then manages collections, either openly (factoring, where the customer knows a third party is managing their account) or confidentially (invoice discounting, where the customer continues to pay the business directly).
This approach shifts the credit control burden from the business to the finance provider, who has specialist collections infrastructure and legal resource. It also eliminates the cash flow impact of late payment entirely: the business receives its money regardless of when the customer pays. For businesses with turnover above approximately £100,000 per year and B2B customers, invoice finance is often a more scalable solution than building an in-house dunning operation.
Frequently Asked Questions
How long should I wait before taking legal action for an unpaid invoice?
Most commercial solicitors recommend issuing a Letter Before Action at 30 to 60 days overdue, giving the debtor 14 days to respond before filing a County Court claim. Always send a formal final demand letter before legal action, as courts expect evidence of reasonable attempts to resolve the matter.
Does dunning damage customer relationships?
A well-structured dunning process, delivered professionally and consistently, rarely damages relationships with customers who intend to pay. It signals that your business is professionally managed and that your payment terms are serious. Customers who are genuinely in financial difficulty will usually engage when contacted; those who do not engage are flagging a more serious problem worth knowing about earlier rather than later.
The bottom line
If late payment is affecting your cash flow, Spark Finance can identify whether invoice finance or factoring is a better long-term solution than managing the dunning process manually. Start at apply.sparkfinance.co.uk.
Check your eligibilityAbout the author
Mark Harris
Relationship Manager
Mark is a Relationship Manager at Spark Finance with a strong track record in merchant cash advances and short-term business loans. He specialises in revenue-based finance for hospitality, retail, and leisure businesses, helping operators access flexible funding tied to card sales volumes.
