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Graphic by David Freeland

Mister, can you spare a latté?

Economy | Small businesses of America are no small part of the U.S. economy, and on their survival may hang the country's financial comeback

Issue: "Not over till it's over," Nov. 1, 2008

SAN DIEGO and NEW YORK-When Think Coffee on Mercer Street in Manhattan opens at 7 a.m., there are usually people waiting outside to duck in and stake their claim. As the day wears on, freshmen and teachers, hipsters and nerds pack the place-buried in books, guzzling Fair Trade coffee, eating vegan brownies. Political art covers the walls. Eclectic coffeehouse furniture fills every nook where eclectic coffeehouse furniture will fit. Turn around, and your elbow will likely bump someone's psychology textbook. Or you'll fight a grad student for an outlet to plug in your laptop.

Jason Scherr hopes it will stay that way. With a stake in four New York concerns, Scherr is one of millions of small business owners keeping a wary eye on the U.S. economy: Stormy equities markets, spiraling energy costs, tightened lending, the mortgage crisis, and sluggish consumer spending have combined to sink some small businesses, while others have steamed ahead.

In the world of business, small is a relative term. The Small Business Administration (SBA) defines it as a firm with 500 or fewer employees. But when measured by sheer number of establishments, 90 percent of all U.S. businesses are the kind you see along Main Street-gift nooks and beauty parlors, watch repair shops and stores selling used books. They are typically retail and service establishments, "mom-and-pops" putting bread on the table for fewer than 20 workers.

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"These are owner-operated businesses, where the owner is not chairman of the board, dealing with strategic issues, but actively engaged on a daily basis in all aspects of the business," said Allan Adams, state director for the Small Business Development Center at the University of Georgia in Athens. "These are people who often have their personal assets somewhat entwined in the business-their homes leveraged, for example-so that if the business goes under, so does much of their net worth."

Among such folks WORLD spoke with about the state of the economy, two words popped up again and again: caution and optimism.

Scherr, for example, is cautiously optimistic about the long-term viability of the three-dollar latté. He even theorizes that the flagging economy will boost business: "I think you can possibly get a lot for your three-dollar latté if you come here and hang out for 45 minutes or an hour," said Scherr, who owns a second Think Coffee location in East Village, as well as slices of a cheese shop and a café in a pricier part of Brooklyn. "It's actually fairly inexpensive entertainment."

Still, bitter economic trends have dripped down to his businesses. The surge in wheat prices sent up the price of baked goods 25 percent to 30 percent, he calculates. And all his suppliers have added fuel surcharges of $10 to $20 per delivery, which adds up for a merchant receiving six to seven deliveries a day.

"My margins shrunk and I was like, all right, I have to raise prices," Scherr said.

The credit crunch also hit Scherr when he attempted to expand his business last year. He signed the lease for Think Coffee three years ago and opened his doors six months later. But in 2007, while negotiating financing to open the location in East Village on Bleecker Street, the available loan size dwindled as the months wore on, cutting into his ability to capitalize and improve the new shop.

Stung by the mortgage crisis, stingy lenders have indeed tightened purse strings, even on loans guaranteed by the SBA. The agency's New York district office backed $622 million in loans in fiscal year 2007, but only $560 million in fiscal year 2008, which ended Sept. 30.

Out west, the San Diego district office saw a sharp drop in the total number of loans, from 1,702 last year to 1,026 in 2008. "We had been on a steady year over year increase since 2005," said district director Ruben Garcia. "To see it drop off so dramatically, I think our numbers are beginning to reflect what's happening in the economy."

The 40 percent slide in San Diego was greater than the lending drop-off in SBA Region IX, which includes all of California, Arizona, Nevada, Hawaii, and Guam.

Larger banks tightened restrictions more than smaller ones, such as community institutions that were not exposed to the mortgage crisis. But Michael J. Pappas, SBA Region II director, said tight-fisted lenders may not account for all such declines. In some instances, small business owners may simply be choosing not to seek a loan: "It could be the questions in their own mind and the uncertainty of the future. It could be that they're not certain whether the product they produce or the service they provide will be in the same degree of demand."

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