SaaS Payment Disputes: Demand Letters for Breach of Contract and Nonpayment
SaaS providers operate on a model where services are delivered first and payment follows. This inversion of the traditional retail transaction creates a structural vulnerability. A customer can use the software for months, integrate it deeply into their operations, extract significant value from it, and then simply stop paying. Unlike physical goods that can be repossessed or services that can be withheld before delivery, software-as-a-service creates an awkward limbo where the provider must decide whether to cut off access, risk never being paid for past use, or continue service in hopes of eventual payment.
This article explains how demand letters function as a collection and enforcement tool in SaaS payment disputes. The focus is on breach of contract cases involving nonpayment, usage violations, and license overages, rather than chargeback abuse or payment processor issues, which are addressed in separate guidance.
The SaaS Payment Problem: Why Simple Collection Does Not Work
Traditional debt collection assumes a completed transaction. Goods were delivered, services were rendered, and now the creditor seeks payment for a finished obligation. SaaS arrangements are rarely that clean.
The customer may still be actively using the software when they stop paying. They may have configured integrations, loaded proprietary data, trained employees on the system, and built business processes around it. Shutting down their access immediately creates leverage but also invites claims of wrongful termination, breach of the implied duty of good faith and fair dealing, or even tortious interference with the customer’s own business relationships if the cutoff causes them to fail to meet obligations to third parties.
Some SaaS contracts include explicit rights to suspend or terminate for nonpayment, often with notice periods and cure provisions. Others are silent or ambiguous, particularly when the relationship started with a clickwrap agreement that has since been amended through email exchanges, upgrade conversations, or informal custom-plan discussions that were never properly documented.
SaaS pricing models compound the problem. Per-seat licenses mean a customer can exceed their licensed user count and argue they did not realize additional fees would apply. Usage-based billing means disputes over how usage is measured and whether certain API calls, storage volumes, or transaction counts should have triggered higher charges. Annual contracts paid monthly mean the customer may have received a discount in exchange for a commitment they now want to abandon mid-term.
A demand letter in the SaaS context must therefore do more than recite an unpaid invoice. It must establish the contractual foundation, address the customer’s likely defenses, clarify what happens to their access and data, and create a clear path to resolution that balances the provider’s need for payment against the customer’s operational dependencies.
Legal Foundation: Contract Terms Control Everything
SaaS disputes are governed by the contract between the parties, which in most cases means the provider’s terms of service, any master subscription agreement or order form, and potentially a data processing addendum or service-level agreement. Unlike consumer transactions protected by layers of statutory regulation, commercial software agreements are generally enforced as written, with courts reluctant to rewrite deals negotiated between businesses.
California law, like most jurisdictions, recognizes that clickwrap agreements are binding when the user has reasonable notice of the terms and takes an affirmative action manifesting assent, such as clicking an “I agree” button. Courts have consistently enforced such agreements even when the terms were not read, provided they were reasonably accessible. The Ninth Circuit’s decision in Nguyen v. Barnes & Noble Inc. established that browsewrap agreements, where terms are merely linked without requiring affirmative acceptance, are less reliably enforceable, but true clickwrap agreements where acceptance is required to proceed are routinely upheld.
The Uniform Commercial Code’s Article 2 governs sales of goods but generally does not apply to pure software licenses or SaaS arrangements, which courts typically analyze as service contracts or licenses. The legal distinction matters because UCC warranties and remedies do not automatically apply, and providers have more freedom to disclaim implied warranties and limit remedies through carefully drafted terms.
When a SaaS customer stops paying, the provider’s remedies flow from the contract and general contract law. The provider can pursue damages for breach, which typically means the unpaid amounts owed under the agreement. If the contract includes a term commitment, damages may extend to future amounts that would have been paid through the end of the term, potentially reduced by amounts the provider avoids by re-selling the capacity to another customer.
The Restatement (Second) of Contracts addresses when a party’s failure to perform excuses the other party’s obligations. Material breach by one party generally relieves the other party of further performance obligations. In SaaS arrangements, nonpayment is ordinarily a material breach that justifies suspension or termination, but the contract’s specific terms on termination rights and procedures must be followed.
California’s implied covenant of good faith and fair dealing, which is read into every contract, requires parties to refrain from actions that would destroy or injure the other party’s right to receive the benefits of the contract. This doctrine creates some limits on how abruptly a SaaS provider can terminate service, even for nonpayment, if the termination is designed to extract leverage beyond what the contract allows or to cause gratuitous harm.
When Nonpayment Is More Than Just Late Payment
Not every missed payment justifies an aggressive collection posture. Many legitimate SaaS payment disputes arise from confusion, administrative delays, billing errors, or genuine dissatisfaction with service quality.
A customer may have intended to cancel but failed to follow the cancellation procedure outlined in the terms. They may have disputed a charge through their credit card company, triggering a chargeback that the provider contests. They may have experienced service outages or bugs that they believe justify withholding payment until issues are resolved. They may have lost their credit card information after a security breach or simply allowed a card to expire without updating payment details.
In those situations, the provider’s initial response should usually be an administrative outreach: a polite invoice reminder, an email asking whether there is a problem with the service, or a phone call to resolve technical issues. Moving directly to a formal demand letter can damage the customer relationship unnecessarily and may create the impression that the provider is unwilling to address legitimate service problems.
Demand letters make sense when the nonpayment appears deliberate or when initial outreach has been ignored. Common patterns include customers who acknowledge the debt but make excuses without ever paying, customers who stopped responding to communications entirely, customers who are clearly still using the service while refusing payment, and customers who are trying to negotiate a discount or settlement after having already received months of service at the original price.
License overage disputes present a different fact pattern. A customer signs up for a five-seat license, but the provider’s usage tracking shows that 12 users have logged in during the billing period. The contract may state that overages are automatically charged, or it may be silent on the issue. The customer may claim they were unaware of the additional users, that the provider should have blocked access at the license limit, or that some of the users were merely testing the system and should not count as full seats.
In these cases, the demand letter must establish not only that payment is owed but also that the method of measuring usage is accurate and contractually authorized. That often means attaching detailed usage logs, screenshots of the contract’s overage provisions, and evidence that the customer had tools available to monitor and control their user count.
Building the Evidence File Before Writing Anything
A SaaS demand letter is only as strong as the documentation behind it. Before drafting, the provider should assemble a complete file that proves the existence and terms of the contract, the customer’s acceptance, the delivery of services, and the failure to pay.
The contract documentation should include the initial terms of service the customer accepted, dated screenshots or PDF copies showing exactly what terms were displayed at signup, any order forms or proposals that specify pricing and payment terms, and email confirmations sent at the time of signup. If the customer is a business entity, the file should also include evidence of the authority of the person who agreed to the terms, particularly for higher-dollar enterprise deals.
Service usage records are critical. SaaS providers should collect login timestamps showing when users accessed the system, feature usage logs demonstrating that the customer used specific functionality that was paid for, API call records if pricing is usage-based, data storage volumes if relevant to the billing model, and any customer-generated content or configurations within the system that would be lost if access is terminated.
Communications with the customer create the narrative arc of the dispute. Providers should preserve initial welcome emails and onboarding messages, support tickets and their resolutions showing that technical issues were addressed, billing invoices and payment reminders sent before the demand letter, and any emails where the customer acknowledged the debt or promised to pay.
Payment records from the processor or merchant account establish the payment history and show whether there were prior successful payments that demonstrate the customer’s acceptance of the pricing, whether there were failed payment attempts due to declined cards or insufficient funds, and whether the customer initiated any chargebacks or disputes through their bank.
If the customer has since used a free trial or downgraded to a free tier while still owing money for the paid period, those actions can be powerful evidence of continuing engagement with the provider and acknowledgment of the relationship.
Timing and Coordination with Account Status
One of the most difficult tactical questions in SaaS disputes is whether to terminate access before or after sending a demand letter. The decision depends on the contract terms, the amount at issue, and the provider’s risk tolerance.
If the contract clearly authorizes immediate termination for nonpayment without notice, and the provider is comfortable losing the customer permanently, shutting down access before sending the letter can be effective. The customer suddenly loses functionality they depend on and must choose between paying the arrears to restore access or walking away from whatever value they had built in the system. This approach works best when the unpaid amount is relatively small, the customer has not invested significant data or integration effort, and the provider has reason to believe the customer is solvent and capable of paying quickly once motivated.
The risk is that immediate termination may undermine the provider’s legal position if the customer later claims there were service issues justifying nonpayment, or if the provider’s termination procedure violated contractual notice requirements. It can also destroy any chance of salvaging the customer relationship or up-selling them in the future, which may matter if the dispute is over a few missed payments rather than a fundamental unwillingness to pay.
The safer sequence is usually to send the demand letter first while the account is still active but flagged for imminent suspension. The letter can state that access will be terminated on a specific date unless payment is received or a payment plan is agreed upon. This preserves the customer’s motivation to keep access while giving them a clear deadline and path to resolution.
For customers who are significantly behind on payment and clearly not intending to pay, an intermediate approach is to place the account in a limited or read-only mode. The customer can still retrieve their data and see what they are losing but cannot fully use the service. That reduces the provider’s ongoing costs while maintaining pressure without an irreversible cutoff.
In some cases, particularly with larger enterprise customers or situations involving data privacy laws, the provider may have contractual or regulatory obligations to allow the customer access to export their data even after termination. The European Union’s General Data Protection Regulation (GDPR), for example, includes data portability rights that apply in certain circumstances. Providers should review their contracts and applicable law before blocking all access.
Calculating Damages and Deciding What to Demand
The demand amount should be calculated carefully and explained clearly in the letter. Simply saying “you owe us money” without breaking down the calculation invites disputes and gives the customer an easy basis to refuse.
For straightforward monthly billing arrangements, the calculation is usually simple: multiply the monthly subscription fee by the number of unpaid months, add any applicable late fees or interest if the contract allows them, and potentially add usage overages if applicable. The letter should attach copies of the invoices showing each charge.
For annual or multi-year contracts paid in installments, the analysis is more complex. If the customer stops paying midway through a contract term, the provider may be entitled to the remaining balance owed for the full term, but that depends on whether the contract is truly binding for the entire period or whether the customer can cancel on notice.
Many SaaS contracts include auto-renewal clauses that extend the term unless the customer cancels by a certain deadline. If a customer stops paying during an auto-renewed term, they may argue they intended to cancel and should not be liable for the renewal period. The provider’s position is stronger if it can show the customer continued using the service after the renewal date without objection, received renewal notices that they did not respond to, and explicitly agreed to auto-renewal terms at signup.
Usage-based billing disputes require the provider to show exactly how usage is measured and what the contract says about usage charges. The demand letter should include usage reports showing the specific billable events, explain how the provider’s systems track and calculate usage, and attach the contract section that authorizes the charges. If the contract is ambiguous on usage calculation, the provider should acknowledge the ambiguity but argue that the customer’s continued use constituted acceptance of the billing methodology.
In some cases, it makes sense to demand less than the full contractual amount in exchange for immediate payment and a mutual release. Offering a settlement discount of 20-30% can be attractive if the alternative is months of collection efforts, the cost of litigation, and the risk that the customer files for bankruptcy or simply vanishes.
Interest and late fees should only be demanded if the contract explicitly authorizes them and specifies the rate and calculation method. Some states limit the interest rate that can be charged on commercial debts. California, for example, allows contracting parties to agree on any interest rate in writing, but in the absence of a written agreement, the legal rate is limited. The letter should cite the specific contract provision that allows late fees or interest, rather than asserting them as if they are automatic.
Contract Defenses You Will Encounter
Customers who receive a demand letter rarely respond with an immediate payment. Instead, they often raise defenses or counterclaims that the provider must be prepared to address.
The most common defense is “I never agreed to those terms.” This is particularly likely if the customer signed up through a sales-assisted process where terms were discussed verbally but not fully documented, or if the terms of service were updated after the initial signup and the customer claims they did not consent to the changes. The provider should respond by attaching evidence of the clickwrap acceptance at signup, showing that the terms were accessible and the customer took affirmative action to accept them, and demonstrating that any changes were made in accordance with the amendment process described in the original terms.
Another frequent defense is “the service did not work as promised, so I’m justified in withholding payment.” This defense can be legitimate if the provider failed to deliver material functionality that was promised in marketing materials or the contract. However, it is often asserted opportunistically after the customer has already used the service extensively. The provider should respond by showing that the customer used the service heavily for an extended period without complaining, addressed any support issues through tickets that were resolved to the customer’s satisfaction, and did not attempt to cancel or request a refund until after a demand for payment was sent.
In some cases, customers claim they provided notice of cancellation but the provider failed to process it. If the contract includes specific cancellation procedures, such as submitting a cancellation request through the account portal or sending written notice to a specific email address, the provider can refute this defense by showing that no such notice was received. If the customer claims they sent an email that the provider “must have lost,” the provider should explain that it maintains records of all customer communications and no such email appears in those records.
Force majeure defenses have become more common since the COVID-19 pandemic. A customer may claim that economic disruption or business closures made it impossible to pay, and therefore they should be excused from performance. Most force majeure clauses in commercial contracts require the event to make performance impossible or impracticable, not merely more difficult or less profitable. A general economic downturn does not ordinarily excuse payment obligations, though a government order specifically prohibiting the customer’s business operations might.
Breach of warranty claims can arise if the customer alleges that the software contained defects or did not meet specifications. Most SaaS terms disclaim all warranties except for express warranties in the contract, and include “as is” language that limits the provider’s liability. If the customer raises this defense, the provider should respond by citing the warranty disclaimer in the contract, noting that the customer had an opportunity to evaluate the software during any trial period before committing to paid service, and pointing to evidence that the customer successfully used the software for its intended purpose.
Structuring the SaaS Nonpayment Demand Letter
The letter should be direct and businesslike. Its audience is usually a customer who has already ignored multiple invoices and informal requests, so excessive politeness is counterproductive, but hostility or accusations of fraud should be avoided unless clearly supported by evidence.
The opening should identify the parties, reference the software product or service at issue, state the total amount owed, and summarize why payment is overdue. This section should be concise enough to fit in a single short paragraph or two.
The factual background section then walks through the transaction history chronologically. It starts with the customer’s signup or contract execution, noting the date, the terms accepted, and how acceptance occurred. It then describes the service provided, referencing specific features used, usage levels, and the time period covered. Next, it addresses the payment obligation, noting when invoices were sent, what payment terms applied, and when payment was due. Finally, it recounts the nonpayment and any prior collection attempts, showing that the customer has been given multiple opportunities to pay or raise concerns before receiving a formal legal demand.
After establishing the facts, the letter should explain the legal basis for the claim. This section does not need to be lengthy or cite multiple cases, but it should clearly state that the customer entered into a binding contract, the provider performed its obligations, the customer failed to pay, and that failure constitutes a material breach entitling the provider to damages.
The demand portion should specify the exact amount owed, broken down by category if there are multiple components such as base subscription fees, usage charges, and late fees. It should state the form of payment required, such as wire transfer or credit card, and provide detailed payment instructions. It should set a clear deadline, typically 10 to 14 days from the date of the letter, by which payment must be received or a payment plan proposed.
The consequences section explains what will happen if the deadline passes without resolution. For SaaS providers, the most important consequence is usually termination of access and deletion of data. The letter should state clearly that access will be terminated on a specific date, that the customer will lose the ability to retrieve their data unless they export it before that date, and that the provider will pursue additional remedies including potential litigation to collect the debt.
Some providers include language about reporting the debt to credit bureaus or engaging collection agencies. This should only be included if the provider actually intends to do so and is aware of the requirements of the Fair Debt Collection Practices Act and similar state laws, which impose restrictions on collection activities even in commercial contexts.
The letter should close by reserving all rights and remedies, stating that nothing in the letter constitutes a waiver of any claims or defenses, and providing contact information for the person the customer should communicate with regarding the demand.
Suspension, Termination, and Data Deletion Considerations
The most powerful leverage a SaaS provider has is control over access. But exercising that leverage improperly can create legal risk and operational problems.
Many SaaS contracts include detailed procedures for suspension and termination that specify how much notice must be given, whether the customer has a cure period to remedy payment defaults, and what happens to the customer’s data after termination. Providers must follow these procedures carefully. Failing to provide required notice, terminating before the cure period expires, or immediately deleting data that the contract says will be retained for a specified period can all give rise to counterclaims.
Even if the contract authorizes immediate termination for nonpayment, the manner of termination matters. Simply shutting down access without any notice can be portrayed as high-handed or retaliatory, particularly if the customer has been actively communicating about service issues or negotiating a resolution. A more defensible approach is to announce the termination in writing, state the effective date, remind the customer of their obligation to export any data they wish to retain, and then follow through on the announced schedule.
Data deletion policies should be clearly stated in both the contract and the termination notice. Many providers retain customer data for 30 days after termination to allow for possible reinstatement or data retrieval, then permanently delete it. The demand letter should specify this timeline and emphasize that the customer is responsible for exporting their data before the deletion deadline.
In regulated industries or where GDPR or similar privacy laws apply, the provider may have specific obligations about data deletion or retention that override contract terms. Providers should consult privacy counsel before permanently deleting customer data, particularly if the customer has made a data portability request under GDPR or has asserted that deletion would violate their rights under applicable law.
Small Claims and Regular Court: Where SaaS Disputes End Up
When demand letters do not produce payment, the next step is usually litigation. For smaller SaaS disputes, that means small claims court.
In California, individuals and sole proprietors can bring small claims actions for up to $12,500, while other business entities have a lower cap of $6,250. Many other states have similar limits, typically ranging from $3,000 to $10,000. This means that the average unpaid SaaS invoice for a monthly subscription of a few hundred dollars per month is well within small claims jurisdiction.
Small claims procedures are designed to be accessible without a lawyer, though businesses often choose to have counsel prepare the case even if the lawyer cannot represent them at the hearing in some jurisdictions. The California courts provide extensive self-help resources explaining how to file a claim, serve the defendant, and present evidence at the hearing.
The advantage of small claims is speed and low cost. Cases are typically scheduled for hearing within a few months, filing fees are modest, and formal discovery is usually not available, which keeps costs down. The disadvantage is the limited damages cap and the fact that the case will be decided by a judge in a relatively informal setting where sophisticated legal arguments may not be as effective as they would be in regular court.
For higher-dollar disputes, providers must file in regular civil court, where the procedural requirements are more complex and attorney representation is effectively necessary. These cases often settle after initial pleadings are filed, once the customer realizes the provider is serious about pursuing the claim and calculates the cost of defending the case.
One strategic consideration is the choice of jurisdiction. Most SaaS contracts include a forum selection clause specifying where disputes must be litigated, often in the provider’s home jurisdiction. If the customer is in a distant state or country, enforcement becomes more complicated even if the provider wins a judgment, but the inconvenience and expense of litigating far from home can itself motivate settlement.
Collection Alternatives and Credit Reporting
Not every unpaid SaaS invoice justifies the cost of litigation. For smaller amounts or customers who appear judgment-proof, alternative collection methods may make more sense.
Third-party collection agencies specialize in pursuing unpaid debts on behalf of creditors. They typically work on a contingency basis, taking a percentage of whatever they collect, usually between 25% and 50% depending on the age and size of the debt. The advantage is that the provider incurs no upfront cost and does not need to spend internal resources on collection efforts. The disadvantage is that the provider gives up a significant portion of the recovery and has less control over the collection tactics used.
Collection agencies are regulated by the Fair Debt Collection Practices Act (FDCPA) and state equivalents, which impose restrictions on communication practices, prohibit harassment and deceptive tactics, and require specific disclosures. Even though the FDCPA primarily applies to consumer debts, some of its protections have been extended to commercial contexts through state laws, and agencies are generally careful to comply even when collecting business debts to avoid regulatory problems.
Before engaging a collection agency, providers should vet the agency carefully to ensure it is licensed in the relevant states and has a track record of ethical practices. An overly aggressive agency can damage the provider’s reputation and create liability.
Credit reporting is another tool that can motivate payment. Commercial credit bureaus such as Dun & Bradstreet and Experian maintain reports on business payment behavior, and many suppliers report payment defaults to these bureaus. A negative mark on a business’s credit report can make it harder for that business to obtain credit, lease equipment, or sign contracts with other vendors.
However, credit reporting is subject to regulations including the Fair Credit Reporting Act (FCRA) and requires the debt to be valid, accurate, and properly documented. Reporting a disputed debt or one where the customer has raised legitimate service issues can expose the provider to liability under the FCRA for inaccurate reporting.
Providers should generally reserve credit reporting for clear-cut cases where the debt is undisputed or where the provider has already won a judgment, and should ensure they follow the credit bureau’s specific procedures for reporting commercial debts.
Payment Plans and Settlements: When to Compromise
Not every demand letter should be a take-it-or-leave-it ultimatum. In many cases, offering structured payment terms or a partial settlement is more likely to result in actual collection than insisting on full payment immediately.
A payment plan can be attractive to a customer who acknowledges the debt but lacks cash flow to pay the full amount at once. The provider can offer to accept the debt in installments over three to six months, possibly with a small portion of interest or late fees waived as an incentive to commit to the plan. The key is to structure the plan so that the installments are large enough and short enough that the customer cannot simply ignore them after making one or two payments.
The payment plan should be documented in a written agreement that includes the payment schedule, specifies that missing any payment triggers immediate acceleration of the entire balance, reserves the provider’s right to terminate service if payments are not made, and includes a confession of judgment or similar provision that allows the provider to quickly obtain a court judgment if the customer defaults.
A settlement for less than the full amount can make sense when the debt is old, the customer’s ability to pay the full amount is questionable, the cost of litigation would consume a significant portion of the recovery, or the provider simply wants to close out the matter and move on. A typical settlement might involve the customer paying 50-70% of the balance in exchange for a full release of all claims.
The settlement agreement should be carefully drafted to ensure it is enforceable and that the provider actually receives the agreed payment before releasing claims. Payment should be required by wire transfer, cashier’s check, or other method that cannot be reversed, rather than by credit card or regular check which can potentially be stopped or charged back.
Both payment plans and settlements should include mutual releases and non-disparagement clauses to prevent the customer from later claiming they were coerced into the agreement or from posting negative reviews that reference the dispute.
When the Customer Countersues or Threatens Claims
In some disputes, the customer responds to the demand letter not with payment but with their own claims against the provider. Common counterclaims include breach of contract based on alleged service failures, breach of warranty, violation of the implied covenant of good faith and fair dealing, or even fraud if the customer claims the provider misrepresented the product’s capabilities during the sales process.
These counterclaims can be genuine or tactical. A customer who has no defense to the nonpayment claim may assert counterclaims simply to muddy the waters, create leverage for settlement, and increase the provider’s litigation costs. On the other hand, some customers do have legitimate grievances that were ignored while the provider focused on collecting payment.
When a customer raises counterclaims in response to a demand letter, the provider must evaluate them objectively. If there is substance to the claims, settling the entire dispute for a reduced payment may be the most practical outcome. If the counterclaims are clearly baseless, the provider can respond with a follow-up letter explaining why the claims lack merit and reiterating the demand for payment, but should be prepared for the possibility that the dispute will escalate to litigation.
One tactic some customers use is to threaten regulatory complaints or negative publicity. They may threaten to report the provider to the Better Business Bureau, the state attorney general, or online review platforms unless the debt is forgiven. Providers should not be intimidated by these threats if the underlying facts are in their favor, but should be mindful that defensive or aggressive responses can sometimes feed into the narrative the customer is trying to create.
The best response is usually to remain professional, restate the facts, and make clear that the provider stands by its position. If the customer does file complaints or post negative reviews, the provider can respond factually and briefly, noting that the matter involves a payment dispute and that the provider has made good-faith efforts to resolve it.
Practical Workflow: Integrating Demand Letters into Dunning Processes
For SaaS providers that deal with payment issues regularly, demand letters should be part of a structured dunning process rather than isolated one-off actions.
The typical workflow starts with automated payment failure notices sent by the billing system when a card is declined. These notices are polite and assume the failure was accidental, with language like “We were unable to process your payment. Please update your payment method to avoid service interruption.”
If the payment still is not received after one or two automated retries, a more direct email should go out from the accounts receivable or customer success team, stating that the account is past due and asking the customer to update payment information or contact the provider if there is a problem.
If another week passes without payment or response, a formal past-due notice should be sent, typically from a finance manager or someone with more authority than the first-level outreach. This notice should state the specific amount owed, reference the contract terms, and give a short deadline for payment before access is suspended.
Only after these steps have been exhausted should a formal demand letter be sent, either by the provider’s in-house legal team or by outside counsel. By that point, the provider has given the customer multiple chances to resolve the issue voluntarily and has documented a pattern of nonresponse.
This graduated approach serves several purposes. It separates customers who have genuine payment issues from those who are intentionally avoiding payment. It creates a record that shows the provider made reasonable efforts to resolve the matter informally. And it preserves customer relationships in cases where the issue truly was an oversight or a technical problem rather than deliberate nonpayment.
Automating Contract Enforcement at Scale
For providers with hundreds or thousands of customers, sending individual demand letters for every payment default is not practical. The solution is to automate as much of the process as possible while reserving manual legal intervention for higher-dollar disputes or particularly problematic customers.
Modern billing platforms like Stripe, Chargebee, and Recurly include dunning management features that automatically send payment reminders, retry failed payments, and suspend accounts after defined grace periods. These systems can be configured with escalation rules that flag accounts meeting certain criteria for manual review.
A practical threshold might be to automatically suspend accounts with balances under $500 after 30 days of nonpayment and minimal usage, while flagging accounts with balances over $500, accounts with heavy usage despite nonpayment, or accounts that have a history of payment disputes for manual review by the legal or finance team.
For the manually reviewed accounts, a decision tree can help determine next steps: if the customer has been responsive but is negotiating over service issues, assign to customer success for resolution; if the customer has been unresponsive or has clearly stopped paying intentionally, send a formal demand letter; if the customer has made partial payments or proposed a payment plan, evaluate whether to accept it based on the payment history and amount at issue.
By automating routine cases and focusing legal resources on the disputes that matter most, providers can maintain an effective collections program without excessive overhead.
Building Better Contracts to Avoid These Disputes
Every payment dispute is an opportunity to improve the underlying contract. After several rounds of sending demand letters and litigating nonpayment cases, patterns emerge that suggest specific contract revisions.
Payment terms should be crystal clear, stating exactly when payments are due, what the billing cycle is, whether the customer will be auto-billed or must pay invoices manually, and what happens if payment fails. If the provider offers a discount for annual prepayment, the contract should clearly state that switching to monthly billing mid-term requires paying the unamortized portion of the discount.
Termination and suspension provisions should be detailed and unambiguous. The contract should state that the provider may suspend access immediately upon nonpayment without notice, or alternatively that the provider will give X days notice before suspension but that continued use during the notice period does not waive the payment obligation. It should specify what happens to customer data after termination, how long the customer has to export it, and whether the provider charges for data retrieval services.
Usage tracking and overage provisions should explain exactly how usage is measured, what happens when usage exceeds the plan limit, whether overages are charged automatically or require customer approval, and how customers can monitor their own usage to avoid surprise bills. If there are different methods of measuring usage, such as monthly active users versus total registered users, the contract should specify which method applies.
Late fees and interest provisions should be clearly stated if the provider wants to charge them, with specific rates and calculation methods. Providers should check state law limits on interest rates and ensure their provisions comply.
Finally, the contract should include a clear dispute resolution process that requires the customer to raise service issues or billing disputes within a specific timeframe, encourages informal resolution before litigation, and includes a forum selection clause and choice of law provision that favor the provider.
FAQ
What should I do if a customer stops paying but continues using my SaaS product?
Start with your contract’s termination provisions. If it allows immediate suspension for nonpayment, consider placing the account in a limited mode where the customer can see their data but not fully use the service. Send a formal notice stating that access will be fully terminated by a specific date unless payment is received. Document the customer’s continued usage during the nonpayment period, as this strengthens your position that they knowingly used services they did not pay for. If the contract is unclear on whether you can terminate immediately, err on the side of giving reasonable notice to avoid claims that you breached the implied duty of good faith.
How much time should I give a customer to pay after sending a demand letter?
Ten to fourteen days is standard for straightforward nonpayment cases. This is enough time for the customer to arrange payment or consult with their own attorney, but not so long that they can delay indefinitely. For larger amounts or enterprise customers, you might extend this to 21 days if you believe the customer needs approval from multiple decision-makers. If the customer responds before the deadline requesting more time or proposing a payment plan, you can extend the deadline by mutual agreement, but put that extension in writing and make clear that it does not waive any of your rights.
Can I charge interest or late fees even if my original contract did not mention them?
Generally no, unless your jurisdiction allows statutory interest on unpaid commercial debts. California allows parties to agree to any interest rate in writing, but without a written agreement, post-judgment interest is limited by statute. Do not add interest or late fees to your demand amount unless your contract clearly authorizes them. If you are revising contracts going forward, add a late payment provision specifying the interest rate and when it begins to accrue, and ensure it complies with your state’s usury laws.
What if the customer claims the service did not work properly and that is why they stopped paying?
First, review your support ticket history and service logs to determine if there is substance to the claim. If you have documentation showing the customer used the service extensively without complaints, or that you resolved any reported issues promptly, include that evidence in your response. Most SaaS contracts include warranty disclaimers and limit remedies to service credits or partial refunds, not complete nonpayment. Point out that the customer’s proper remedy was to follow the contract’s dispute resolution process or request a refund under your policy, not to unilaterally stop paying. If the service failures were significant, consider offering a partial credit in exchange for payment of the remainder and a mutual release.
Should I delete the customer’s data immediately when they stop paying?
No, and your contract should specify a data retention period after termination. A common approach is to suspend access to the live service but retain the data in read-only format for 30 days to allow the customer to export it. After 30 days, you can permanently delete the data. This policy should be clearly stated in your contract and in your termination notice. Deleting data immediately or without notice can create liability, particularly if the customer claims they lost valuable business information as a result. In some cases, privacy laws like GDPR may require you to delete personal data upon termination, but you should distinguish between personal data subject to privacy laws and the customer’s own business data.
What should I do if the customer offers to pay half the amount owed to settle?
Evaluate the offer based on the strength of your case, the cost of pursuing full collection, and the likelihood of actually collecting if you reject the settlement. If your evidence is strong, the amount is significant, and the customer appears solvent, you might reject the offer and proceed with litigation. If the debt is older, your contract terms are ambiguous, or the customer has raised defenses that could complicate collection, accepting 50-70% of the balance in exchange for a full release can be a practical outcome. Always document the settlement in writing, require payment by wire transfer or cashier’s check, and include mutual releases and non-disparagement provisions. Do not release your claims until payment has actually cleared.
Can I report nonpaying customers to credit bureaus?
Yes, but be careful about compliance with the Fair Credit Reporting Act and the specific procedures of the credit bureau you are reporting to. Only report debts that are valid, undisputed, and accurately documented. If the customer has raised legitimate defenses or service issues, reporting the debt could expose you to liability for inaccurate reporting. Consult with counsel before reporting a debt, particularly if it is a consumer debt rather than a purely commercial one. For business customers, reporting to commercial credit bureaus like Dun & Bradstreet is generally safer and can be effective in motivating payment since it affects the customer’s ability to obtain credit and do business with other vendors.
What if the customer is in another state or country?
Your contract should include a forum selection clause specifying where disputes must be litigated, ideally in your home jurisdiction. If it does not, you may need to sue in the customer’s jurisdiction, which complicates matters. Even with a favorable forum clause, enforcing a judgment across state lines or internationally requires additional steps. For domestic judgments, most states have adopted the Uniform Enforcement of Foreign Judgments Act, which allows you to register a judgment from one state in another state’s courts. For international customers, enforcement depends on whether there is a treaty or reciprocal enforcement agreement between the countries. In practice, international collection is difficult and expensive unless the amounts are substantial, so you may need to focus on less formal collection methods or simply write off smaller international debts.
How do I handle a customer who claims they are about to file for bankruptcy?
If the customer has actually filed for bankruptcy, an automatic stay goes into effect that prohibits most collection activities, including sending demand letters or filing lawsuits. You may need to file a proof of claim in the bankruptcy proceeding to preserve your right to participate in any distribution. If the customer is merely threatening bankruptcy without having filed, you can continue your collection efforts, but be aware that if they do file soon after you obtain a judgment or receive payment, the bankruptcy trustee could potentially recover that payment as a preferential transfer. Consult with counsel experienced in bankruptcy matters before taking aggressive collection actions against a customer who appears to be insolvent or considering bankruptcy.