Hello Everyone!! So glad I've found this place!!!!
I would just like a little advice or opinion from anyone who may have been or are in the same situation as I am.
I started making cakes by what I would call accident in 2008 with my wedding cake. I couldn't find anyone who would do a tye-dye cake for our tye-dye wedding - I wanted it very colorful, and like the traditional swirl tye dye. So I thought to myself, if I can airbrush something as small as a fingernail (I am a licensed nail tech but only do it as a hobby), I can airbrush a cake! Since then I have been getting requests from friends to make cakes. I didn't do it at first, and over the last year or so the requests just kept flooding in so I decided to give it a whirl.
Over the last few weeks I've prepared a separate kitchen off of my home, had a very very small start up cost, and actually have gotten a little busier than what I had even expected to. I just started advertising only 1 week ago, and already have 8 cake orders for April, and a couple of them are for churches so I will be feeding over 100 or more people (this is a lot for me to feed lol).
Anyhow, Today, I get a call from my mother saying to me "did you see the bakery opening??...dont spend any more money because you aren't going to make it now". I said back to her, "mom I know about it, and that doesn't mean I'm not going to make it, it's not set in stone that I'm doomed. "It really kind of hurt my feelings lol. But I also offer other things besides cakes, other sweet treats such as cinnamon rolls, cookies, and even pet safe sweet treats (can't forget our kitties and doggies)
My biggest question to anyone willing to answer is this: In a small town of between 5-10,000 people, do you think two cake artists/bakeries can survive? I know the other competitor in my area is doing her stuff as a solo person as well, and has a commercial space. I would love to think in my heart its possible. I'm very personal with my clients, I meet with them, taste testing is a must, and I incorporate many ideas, I personalize their experience. so I'm hoping that will keep me going as well. I'd rather be an optimist than a pessimist lol. Up to this point I've never really had a 'dream', this has become my dream, and now I'm a little scared lol. I would love to hear from anyone that maybe in this same situation.

Since your start-up costs were so low, and this is with your house, you probably don't have many expenses that occur when you are not making a cake. (a bakery will still have to pay rent and such even when they are closed.)

I say just keep going as you are and see how it goes and not worry about the other bakery.

I think home-based like you are is the best way to go. With your competitor opening up in a commercial location means her cakes will cost more so that she can offset the cost to run her business. Customers may not want to pay more for what you can offer for less. But most people will tell you the best form of advertisement is word of mouth.
Continue your business without worries.

I have a home-based business and I do fine even though there are plenty of bakeries and other home-based bakers here. Even in a small town you should be okay as long as you keep emphasizing what sets you apart from any competition.

Thank you all! I was thinking the same thing, and trying to talk my self away from what my mother had said. I do so much personalization, airbrushing, fondant/gumpaste work etc... so I hope I'll be okay. I was so broke over the last year and a half, and still couldn't find a full time job, so this to me has been a great blessing and i hope to make it work because I don't want to work for anyone else but my clients lol. Bless you all and happy baking / decorating!!!

What you have to focus on is not competition. Be GOOD at what you do. If you are good, it doesn't matter how many people you are competing with, you'll have a customer base. (I have no idea whether you are or aren't, and that's not the point anyway.)
Not only that, but you need to brand yourself. A bakery must do many types of items to turn a profit, so market yourself as a completely custom business and you are no longer in their market and will attract clients looking for what you offer and the bakery can't.
Good luck!