A construction Sub-Contractor is very happy when he is awarded a larger than usual contract on a Commercial project.
However many times he is not aware of the working capital needed to get the job done.
Construction starts on Day #1 at which time the Sub-Contractor must already have the material supplies needed stored on site. For this he must have Supplier credit, usually 30 days, if he has a good track record. Then the Sub-Contractor must provide the Labor on the job for the following 25 days (Day#25), at which time the Sub- must submit to General Contractor a Pay Application, for materials supplied and work accomplished for the initial 30 days on the job. The GC validates and consolidates all the Pay Applications from all the Subs, and submits for payment from the project Owner (Day#30). The Owner usually pays the GC after another 30 days have past, at which time the GC can pay the Sub (Day#60).
So in summary, the Sub must have the sufficient working capital to provide Labor and Materials on the project for 60 days, before he sees the first payment. The materials Supplier will usually expect to be paid in 30 days, and the Workers on the job either weekly or biweekly.
With factoring the Sub can cut this waiting period of 60 days in half. After the Pay Application is validated by the GC, the Sub can receive an advance from the factoring company, so as to pay the materials Suppliers and continue to pay the Workers wages on the job.