Late payments are a reality for most businesses. In many cases, customers don’t delay payments intentionally — invoices get missed, approvals take time, or priorities shift. This is where dunning letters play a critical role in the accounts receivable process.
When done right, dunning letters help you get paid faster without damaging customer relationships. When done poorly, they frustrate customers and slow collections even further. This guide breaks down what dunning letters are, how they work, and how finance teams can use them effectively.
Table of Contents
What Is a Dunning Letter?
A dunning letter is a formal communication sent to a customer to remind them of an overdue invoice. It is typically part of a structured collections process and escalates gradually if payment is not received.
Dunning letters can be sent via email, physical mail, or customer portals, and usually include details like the invoice number, due date, outstanding amount, and payment instructions.
Why Dunning Letters Are Important
Dunning letters serve multiple purposes beyond just asking for payment:
- They bring overdue invoices back into the customer’s attention
- They create a documented follow-up trail for finance teams
- They help enforce payment discipline without immediate escalation
- They reduce manual follow-ups by AR teams
For many businesses, dunning letters recover payments that would otherwise sit unpaid simply due to oversight.
Common Reasons Invoices Require Dunning
Invoices usually end up in dunning cycles because of everyday operational issues, such as:
- Missed or buried invoices
- Internal approval delays on the customer side
- Disputes or missing documentation
- Partial payments or unapplied credits
- Poor visibility into outstanding balances
Dunning letters help surface these issues early, before they turn into write-offs.
Types of Dunning Letters
Dunning letters are most effective when sent in stages, rather than as one aggressive reminder.
1. Friendly Reminder
Sent shortly after the due date.
Tone is polite and assumes good intent.
2. Past-Due Notice
Sent after continued non-payment.
Tone becomes firmer and highlights overdue status.
3. Final Reminder
Indicates urgency and potential next steps.
Still professional, but clearly escalated.
4. Pre-Escalation Notice
Used before involving collections agencies, legal teams, or account holds.
What a Good Dunning Letter Should Include
An effective dunning letter is clear, concise, and actionable. It should contain:
- Invoice number and date
- Outstanding amount
- Original due date
- Payment instructions or link
- Contact details for queries or disputes
Avoid unnecessary legal language in early stages — clarity works better than pressure.
Common Mistakes with Dunning Letters
Many finance teams struggle with dunning because of a few recurring mistakes:
- Sending reminders too late or too frequently
- Using the same tone for every stage
- Not accounting for disputes or unapplied payments
- Sending reminders for invoices that are already paid
- Relying entirely on manual follow-ups
These issues often lead to customer frustration and wasted effort.
Best Practices for Dunning Letters
To make dunning letters effective and relationship-friendly:
- Segment customers by risk and payment behavior
- Personalize reminders based on invoice context
- Pause dunning when disputes or clarifications are pending
- Align dunning cadence with customer payment cycles
- Track responses and outcomes, not just sends
Dunning should feel like a process — not spam.
How Automation Improves Dunning Effectiveness
Automation helps remove the guesswork from dunning workflows by:
- Triggering reminders automatically based on due dates
- Adjusting tone and frequency based on customer behavior
- Ensuring reminders are sent only for valid, open invoices
- Capturing customer responses in one place
This allows AR teams to focus on exceptions instead of routine chasing.
How FinFloh Helps with Dunning Letters
FinFloh simplifies and strengthens dunning workflows by embedding them directly into the invoice-to-cash process:
Automated, rule-based dunning schedules
The schedules are aligned with invoice aging
Context-aware reminders
These reminders account for disputes, partial payments, and unapplied credits.
AI-driven customer responses
The response are processed through FlohSense AI Agent for faster resolution
Real-time visibility
This is required for visibility into dunning effectiveness, responses, and recovery trends.
Instead of just sending reminders, FinFloh helps close the loop — from reminder to resolution.
You can visit FinFloh Collections Hub AI product for more details.
Conclusion
Dunning letters aren’t about pressure — they’re about clarity, timing, and consistency. When designed thoughtfully and backed by automation, they help businesses recover cash faster while maintaining strong customer relationships.
To know more how to work out the best Dunning Letters, you can talk to our experts.
