The dunning process is part of a company's receivables management, just like accounts receivable and invoicing are. The dunning process deals with outstanding receivables. The employees verify payments received, create dunning notices and subsequently manage them. Each company has its own rules for the exact dunning process in terms of sequence and deadlines. Nevertheless, there are common practices and binding legal regulations.
If a company finds that a customer has not yet paid, it will start its commercial dunning procedure. The dunning process is subject to certain rules. A reminder may be sent for the receivable if the claim is valid and this receivable is due. The due date of a receivable may be contractually agreed upon. Such regulation is either noted on the invoice or in the terms and conditions. A company may set a deadline or request payment for the payment of a service rendered on a certain date. For example, a contract may specify that the payment is due two weeks after receipt of the invoice. If the debtor does not pay within these fourteen days, the company is compelled to begin the commercial dunning process. Deadlines like these are quite common.
If no specific deadline has been agreed, payment is due immediately after the service has been rendered. This is regulated by legislature (§ 271 para. 1 ZPO). In this case, if the customer has left the invoice outstanding for a long time, it is at the discretion of the company as to when a dunning is considered appropriate. Each company's dunning procedure sets different deadlines that determine when to send the first dunning notice. Where there is no specific deadline, the debtor will be in default of the due receivable with the receipt of first dunning notice. 30 days after the service was rendered and invoice received, the debtor is in default of payment in any case, even without dunning notice. At this point, the dunning process takes its course.
It is common in the commercial dunning process to send up to three reminders. However, there is no legal obligation to send three dunning letters. This happens rather out of goodwill to the customer. The three reminders often differ in tone, with each letter becoming increasingly firm. A first reminder is common after about fourteen to thirty days. If the debtor only defaults with this letter, the first reminder is free-of-charge. From this point forward, however, dunning costs may arise which will ultimately be borne by the debtor.
Typically, the commercial dunning procedure ends with a third and final reminder. This third and final reminder will set forth further steps to be taken if no payment is received by a specified date. However, this practice is not required by law. A creditor may take further action from the time of the default of payment and forego the dunning process.
If commercial dunning remains unsuccessful, the dunning process goes one step further. In this phase, a company usually seeks help from an external service provider and appoints a collection agency, for example, Arvato Financial Solutions. The creditor has the right to do so as soon as the debtor has defaulted and does not respond to dunning letters. The collection agency will further handle the dunning process and recovery of the receivable. The service provider then sends more letters or tries to resolve the case with the debtor by phone. From the moment they are appointed, the collection agency is the debtor's first contact and takes care of all aspects of the dunning process. Payments should then only be transferred directly to the collection agency, so that the dunning procedure can be stopped as soon as possible.
The last resort in the dunning process is a legal dunning procedure. In the interests of all parties involved, this should be avoided, since the cost of damages caused by delay (for which the debtor must reimburse the creditor) will increase with a legal dunning procedure.
Businesses can outsource their entire dunning process by entrusting the dunning process to an external service provider. Doing so gives them more capacity to focus on their core business functions. This is the reason why in most variants of factoring, the dunning process transfers to the factor. The factor then monitors if the receivables have been paid and, if not, initiates steps for recovery.