In this instructable, I'll show you how I made some Iron-on faux-embroidered patches, Using T-shirt Transfers, An old pair of Jeans, and some Iron-on Hemming.
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The patches I made are copies of commercially available "Umberella Corporation" badges, but you could make any design you want.
Step 1: Making the Transfers
Ideally, your images should be photographs / scans of actual patches, to give the illusion of texture; or you could add a fabric texture in photoshop (if you can't do either of these, don't worry ; they will pick up some texture from the denim)
Cut them out roughly, then peel them from the backing.
Step 2: Getting the Design on the Denim.
Cover it with non-stick baking parchment, and iron.
Your iron should be on its hottest setting, and you should press down hard. Press; do not slide the iron around.
Leave the paper in place while the denim cools, then carefully peel it off. The design will stay on the denim.
Step 3: Making the Iron-on Backing / Frey Protection
cover the back of the piece with iron-on hemming, and then another layer of the paper.
Repeat the pressing, cooling and peeling from the last step.
You should coat the backs even if you plan to sew-on the patches, as it will help to prevent the denim from fraying.
Step 4: Cut and Apply
When it comes time to attach them, you can either sew them in place, or just place them where you want the, and (once again) cover with the parchment, press, cool, and peel; The hemming will re-melt and adhere the patch to the costume.