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scrapbook paper cutter
Then use a hole punch to punch out each individual letter.
Scrapbook paper cutter sclapbooks organization room scrapbook
But don't limit yourself to this; many collages look great without predefined borders if the pictures are combined nicely.
Scrapbook paper cutter sclapbooks organization room scrapbook
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Scrapbook paper cutter sclapbooks organization room scrapbook
Instead of reinventing the wheel, I'm just going to direct you to the best resource I know of for making homemade paper.
Try crumpling and crumpling other types of paper, they may become cloth-like as well.
scrapbook paper cutter
scrapbook paper cutter