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Throughout the past few years, the credit crunch in the U.S. has continued to be the topic of many conversations. Living in Canada, I will often be asked what exactly the “credit crunch” is because Canada hasn’t been affected to the same extent as the U.S.
It basically started over a year ago, when the U.S. economy was at a high. Mortgage lenders became more aggressive by offering sub-prime mortgages (i.e., loans to individuals with lower credit scores and credit profiles than a specific industry set criteria). However, once the economy started to slow and house prices began to drop significantly, there was an increase in foreclosures and losses incurred on mortgage-backed securities (i.e., a pool of mortgages sold together as security).
The effect of the economic slowdown was magnified by the accounting requirement to market investments to fair value under the financial instruments standards. This strained the operations of major banks, restricting their ability to sell off loans to make room for new lending, and eventually resulted in the fall and sudden sales or rescues of major banks.
Canada has not been completely immune from the effects of the global liquidity crunch. Although Canadian banks generally are more conservative in their lending practices and have stronger regulatory safeguards, they are still looking for greater protection against loan defaults. Therefore, the cost of borrowing has increased, and the ability for businesses to secure debt or refinance/extend their existing debt agreements, has become more challenging. Also, since the U.S. is one, if not the largest trade partner with Canada, their economic slowdown has affected our economy as well.
What can you do to ensure that you come up on top of this crisis?
Focus on cash flows and cost cutting.
Will this crisis last for years? Only time will tell, but Canada’s top economists are predicting that it could last until almost 2010. By staying on top of what is happening in the outside world and how this affects your business’ liquidity and cash flows, you will be able to weather the storm.
For more information on how MNP can help your business survive the economic crisis, please feel free to contact me or your local MNP advisor.
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