A demand letter can be a powerful addition to your collection strategy. Think of it as being more formal than your payment reminders, less formal than a legal notice. An effective demand letter, also known as a letter of demand, dunning letter or debt collection letter, helps your customer to understand the consequences of paying late. It provides details of the debt you’re owed and your payment expectations. In this post, we break down the anatomy of a demand letter so that you can create a compelling piece of communication that expedites cash recovery.

When do I need a demand letter?

A demand letter typically follows a series of failed attempts by the creditor to collect the money owed to them by their debtor. You can generate your own demand letter or you can pay a debt collection agency to send one on your behalf.

Imagine you’re the gift wholesaler, ABC Wholesalers. You’ve supplied your retail customer, XYZ Shopfront with $10,000 worth of goods on credit. The due date was 35 days ago, and since then you’ve sent a few emails to remind them to pay. Despite their promise to pay, the money has not arrived. You’d like to retain XYZ Shopfront as a customer but you can no longer afford to carry this debt. You decide it’s time to take more serious action and send a demand letter.

Send a demand letter when:

• You’ve sent payment reminders and made phone calls without getting a response from your customer.
  
• Your customer promised to pay but the money never arrived.
  
• You want to remind your customer of their payment obligations under your trade credit agreement.
  
• You want to give your customer another opportunity to pay their invoice before you commence legal action.
  

Download our free reminder templates and AR resources

Advice from a debt recovery specialist

At ezyCollect, we partner with debt collection agencies who can help our users to send a demand letter easily. Our partners have a track record of using positive collection techniques to help businesses recover ageing commercial debts. We asked Eddie Smith, debt recovery specialist from Australian Recoveries & Mercantile Agents, for his advice on the best way to write and send a demand letter.

“A demand letter notifies a customer in writing that they are overdue in paying an account, and stipulates the sender’s expectation of payment. The letter of demand can be sent on the creditor’s letterhead or if it arrives on a third party letterhead, debtors tend to pay attention and are typically more influenced to pay,” advises Eddie.

Before you send a demand letter

Eddie’s advice is to make the effort to find out the root cause of non-payment before you send a demand letter.

• Phone your customer and work on resolving any disputed invoices.
  
• Send payment reminders (usually via email) with copies of the overdue invoices attached. Give your customer reasonable time to respond.
  
• Consider allowing your debtor to pay off their debt in instalments if they are experiencing cashflow problems. (Pay by Instalments is a standard payment offer in ezyCollect’s online payment solution.)
  
  

The right time to send a demand letter

“The right time to send a demand letter is when your other internal efforts to recover the debt have been unsuccessful,” advises Eddie. “Once you’ve tried to reach your debtor with email or SMS reminders and phone calls, without success, sending a demand letter is a sensible next step.”

In Eddie’s experience, businesses used to reach the 90-day mark (the invoice is overdue by 90 days) before sending a demand letter, but the trend is changing.

“It’s more common that businesses want to send a demand letter within 60 days, as they understand it’s about getting paid as quickly as possible. They move through their internal efforts more efficiently, then outsource if they need to.”

Still, some businesses sit on overdue debts for far too long. “Small businesses can get personally attached to the debt and sincerely believe their customer will eventually pay—the ‘she’ll be right’ attitude. Bigger businesses don’t do that. For them, it’s about getting paid,” says Eddie.

Even the professionals find it harder to recover money as overdue days increase. “Your debtor’s financial situation can change over time, they might cease trading, and their contact details can change,” says Eddie. In most Australian states, invoices that are more than six years old are considered Statute Barred i.e. they are no longer legally enforceable due to the period of time that has elapsed since the debt was first issued.

Demand letter must-haves:

Eddie advises creditors to write a succinct letter, keep a copy of it, and send it via registered mail for proof of delivery.

Letterhead

Lay out your demand letter on your letterhead or if you have engaged a debt collection or legal firm, they will send the letter of demand on their letterhead. A letterhead contains relevant contact details, including an address and phone number for the business seeking the collection.

Date

It’s important that your letter is dated as evidence of when you tried to contact your debtor.

Debtor’s correct address

Make efforts to find the current listed business address for your debtor. Debt collection firms use a number of data sources to locate debtors.

Title

After your polite salutation, make it clear this is a letter of demand by stating ‘Letter of Demand from <company name> ’.

LETTER OF DEMAND

Details of the debt

Clearly state the details of the debt owing:

• Total amount owing
• Invoice number/s
• Due date/s
• Details of the goods or services provided
• Any late penalties that have accrued (if documented in your customer’s signed contract)
• The name of the person who signed the order with your business.
  

For your debtor’s reference, you can attach copies of invoices and your signed contract that includes payment terms and conditions.

Previous attempts to contact the debtor

Remind your debtor of your previous attempts to contact them about the debt. You can refer to the dates you sent emails or left a phone message.

State your expectation of payment

Outline your payment expectations within your desired time period. For example: ‘Please be advised that I expect full recovery for the debt of $10,000 within seven days of the date of this letter.’

Include payment methods

Advise your debtor of your accepted payment methods e.g. bank account for deposits, details to send a cheque, and/or credit card acceptance.

Consequences

Honestly advise your debtor of your next intended action if they don’t complete the payment. As a creditor, you are not allowed to misrepresent action that you do not intend to take i.e. do not suggest legal action will follow if this is not your intention. However, you can ‘reserve the right to take legal action without further notice to you.’

Remind your debtor of any court or recovery costs they will be liable for should you commence further action. Note that these terms should have been included in the most recent contract your customer signed as part of their trade agreement with you.

Closing
After a polite closing, e.g. ‘Yours sincerely,’ include your signature, name and title in your sign-off.

A note on tone

Being firm but reasonable in tone is important, says Eddie. When Eddie communicates on behalf of creditors, he understands the debt collection letter is an opportunity to save the customer relationship and resolve the issue in a positive way. “We aim to work out a solution for our client that maps a way forward for them and their debtor.”

To sum up:

• Add a demand letter to your collection sequence. Send it when you need to take more serious action to recover unpaid invoices.
• The demand letter clearly articulates your payment expectations.
• Include all relevant invoice details and attach invoice copies.
• Document your previous attempts to collect.
• Remind your customers of the terms and conditions of your trade agreement.
• Do not misrepresent your intended action.
• The demand letter is an opportunity to recover the money in full or part, and save the customer relationship.
  

ezyCollect users can include a demand letter in their collections workflow and activate it with a single click within the app. Our debt collection partners then receive the history of your collection attempts and will send a demand letter on your behalf. A fee per letter applies.

To see our collections workflow in action, request a one-on-one demo:

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