What Is the Dunning Process in Accounting?

Last Updated October 22, 2025

Every business experiences late payments at some point. Learning the basics of how to send an invoice that encourages prompt payment is important, but even then, some customers may not pay on time.

Late payments happen, and how you manage this tricky situation can affect everything from customer relationships to cash flow management. In this situation, following a structured dunning process can make all the difference. Dunning helps businesses recover overdue invoices while maintaining customer relationships.

Whether you’re looking to simplify the dunning process or strengthen your credit management strategy, understanding how the dunning process works can have a major impact on your bottom line. Learn what the dunning process is and which dunning process best practices can help you collect payments in less time.

What Is the Dunning Process?

During the dunning process, a business follows a structured process to collect unpaid invoices from customers. You might also see it referred to as dunning in accounts receivable (AR). Dunning requires sending a series of reminders, starting with polite notices and gradually sending firmer messages with more serious consequences, such as legal action or collections.

Most dunning strategies use a four-phase communication framework to contact customers about unpaid invoices. Each step in the dunning workflow is designed to maintain professionalism, preserve relationships, and improve cash flow.

However, it’s important to note that the overall dunning process encompasses more than these follow-up letters. A well-defined dunning process in credit management helps identify payment risks early, reduce bad debt, and maintain healthy finances.

Most businesses manage dunning automatically with their accounting software. Tools like QuickBooks include modules for automating these messages, which speed up the process and free up your team to focus on more valuable tasks.

Why the Dunning Process Is Important for Credit Management

Do you extend credit terms to your customers? If so, dunning is especially important. It protects your business in so many ways, helping you:

Improve Cash Flow Stability

By following structured dunning procedures, you can identify late accounts quickly and recover funds with less lag time. This proactive approach maintains a healthy accounts receivable cycle and prevents liquidity issues.

Strengthen Customer Relationships

A well-designed dunning workflow shouldn’t aggressively chase payments from customers. Most of your business likely comes from repeat customers, and you don’t want to lose these accounts. With polite, consistent reminders, you reinforce your professionalism while improving customer payment timelines.

Reduce Bad Debt

Bad debt hurts your business by introducing cash flow risk. While you can’t avoid all bad debt, dunning can help flag risky accounts before they turn into losses. Monitoring unpaid invoices through dunning allows finance teams to predict potential defaults and adjust invoice payment terms accordingly.

Stay Compliant

It’s uncommon, but in some cases, customers may completely refuse to pay or cooperate with you. In these cases, you need documentation to escalate to either the legal system or to collections. Following the proper dunning process shows that you did your due diligence in trying to collect payment, which is necessary to take action.

How Does the Dunning Process Work?

The dunning process follows five steps to recover payment from customers.

1. Identify Overdue Accounts

The dunning process starts when your AR accounting team finds delinquent accounts. They review accounts receivable to spot unpaid invoices and flag these customer accounts.

In some cases, your team might flag invoices that are due soon and preemptively send a reminder before the due date. This is a great way to collect payment before the due date, so consider adding proactive check-ins to your automated dunning process, especially if you use a platform like QuickBooks.

2. Send the First Reminder

If the customer fails to pay on time, you send the first dunning letter. This reminder is usually friendly and non-threatening, simply alerting the customer that their payment is past due. Most late payments are an accident, so give the customer the benefit of the doubt in this first dunning notice.

Many companies rely on automated dunning process tools to trigger these messages immediately after the due date. Consider using email templates for asking for payment and plugging them into your dunning tool.

3. Escalate Consequences

If the first message goes unanswered, the dunning process escalates. The second reminder should have a firmer tone and include details about enforcing late fees or service interruptions.

4. Send a Final Notice

If the customer doesn’t answer or refuses to work with you, send a final dunning letter notice. This is the last attempt before you file legal action or send their bill to collections. If the customer is willing to work with you, but can’t pay the full amount, consider offering options for partial payment or new terms to maintain their goodwill.

5. Optimize Based on Performance

Dunning is part of your accounts receivable management strategy. While it’s just one part of the bigger picture, pulling data on dunning performance (as well as your other collection strategies) indicates how effective your business is at receiving payment promptly. Based on what you learn from the data, you may need to change:

• When you send invoices
• Messaging or phrasing
• Message frequency
• Credit terms

Over time, this data helps simplify the dunning process and reduce the need for manual intervention.

Dunning Process Best Practices

If you own a small business, unpaid invoices can feel like an urgent issue. It can be difficult to stay calm if you’re waiting for a customer to pay, but patience is key. Follow these best practices to both improve the dunning process and speed up customer payments.

Standardize Where Possible

Consistency is key, especially if you work with a lot of customers. Give your AR team a standardized playbook for the dunning process. It should include criteria for which accounts qualify for dunning, when to send dunning messages, and how to escalate issues. Outline each step—from the first reminder to final notice—and ensure your team follows the same timeline.

Personalize Messages (Even if You Use Templates)

Customers don’t want to feel like a number. Even if you use dunning templates, add personal touches so they recognize the email as coming from you. Address customers by name and reference invoice numbers to make these emails helpful and personalized. These small touches can minimize frustration and save the relationship, especially if the missed payment was accidental.

Automate With Software

Dunning requires a human touch, but you can automate a large portion of the process. Dunning process software automatically sends reminders, escalates notices, and logs every interaction with zero direction.

Monitor Performance

How effective are your dunning procedures? Tracking metrics like average days outstanding, payment recovery rate, and customer response time will tell you how effective your procedures really are.

Other AR Management Tips to Accelerate Customer Payment

A strong dunning process can speed up customer payment and reduce cash flow problems. Still, it’s just one part of a healthy accounts receivable process. Try these additional tips to speed up payment timelines:

• Be very clear: Some missed payments occur due to miscommunications or confusion. Specify important terms, such as due dates, late fees, and payment options, in your contract and in emails. Automation tools will log this for you, so you shouldn’t need to drop it into each invoice manually.
• Offer flexible payment options: Providing online payment portals, credit card options, or ACH transfers makes it easier for customers to pay promptly.
• Encourage early payments: Don’t just penalize late-paying customers; reward those who pay early. Offer small discounts for people who pay before the due date to reduce your reliance on the dunning process.

How Invoice Factoring Can Help

The dunning process can take several weeks to play out, which means your business must wait a long time before receiving payment. Invoice factoring can bridge the gap in the meantime. By selling your unpaid invoices to a factoring company, you can unlock immediate cash without waiting for customers to pay.

Factoring partners often provide dunning process services as part of their package, meaning they handle payment collection on your behalf. Plus, most factoring companies will do a credit check on your customers. This service can help you identify customers who pose a credit risk early on, saving you a lot of time and hassle down the road.

In-Summary: Dunning Process in Accounting

Dunning is an accounts receivable strategy that helps businesses collect overdue invoices more efficiently. Instead of simply demanding payment the moment an invoice is due, following the dunning process helps you to stay calm, preserve the customer relationship, and receive the funds you’re owed in less time.

Every business deals with late payments at some point, so outline a dunning process for your business now if you haven’t already. If you need cash flow while the dunning process plays out, consider invoice factoring to convert these outstanding invoices into the funds you need to keep your doors open.

Dunning Process FAQs

What does “dunning level” mean?

Dunning level is the severity of an overdue invoice. For example, a first-level notice might be a friendly reminder, while higher levels indicate escalating urgency, such as warnings about service suspension or late fees. Many dunning process software tools automatically assign and track these levels for you.

What is a dunning fee?

Some businesses charge a dunning fee, which is an additional cost added to a late invoice. This charge covers the cost of pursuing overdue payments, and it’s common in industries where businesses extend credit terms to their customers. These fees deter late payments and help offset the cost of the dunning process.

What is the meaning of “dunning charges”?

Dunning charges are the same as dunning fees. If a customer pays late and enters the dunning process, they may see a line item added to their invoice covering the cost of dunning. Your contract should specify whether late invoices will incur dunning charges and, if so, the amount of those charges.

What is the best dunning process software?

It depends on your company size and existing technology stack. Some of the most popular solutions are Churnkey, Recurly, Baremetrics, and QuickBooks. Ultimately, the best solution integrates well with the tech you already use, fits your budget, and is easy to use.

Michael McCareins

Michael McCareins is the Content Marketing Associate at altLINE, where he is dedicated to creating and managing optimal content for readers. Following a brief career in media relations, Michael has discovered a passion for content marketing through developing unique, informative content to help audiences better understand ideas and topics such as invoice factoring and A/R financing.