This is an easy tutorial, you need no more knowledge than knowing your way around Photoshop to complete this text effect, and it uses a free font and a canvas texture. All other effects are generated by Photoshop's built-in tools. However, be warned, it is quite time-consuming!

Resources

Patchwork Letter Font from dafont.com
Canvas Texture from humphreyhippo on deviantart.com

Step 1

Create a new file using the following settings:

Place the red canvas texture into your canvas: Drag the layer from the layers palette and drop it into your canvas.

Name the layer fabric 1

Duplicate the layer and name this layer fabric 2

Image>Image Size – set the width to 1000px, auto height, click OK.

Note: No matter how much text your are going to use, this is the size you need this fabric to be so that the weave is not too large for the text. If you are creating a lot of text duplicate the fabric layer more times.

Step 2

With the fabric 2 layer active:

Image>Adjustments>Black and White – from the drop-down list, select Maximum Black, as shown below:

Step 3

Select the Type Tool, colour blue #3747A7, Patchwork Letter font, size 200pt

Type your text as required.

Step 4

Select the Magic Wand Tool and make sure the text layer is active.

Zoom very well into your image and click the Magic Wand in the main part of the first letter.

If any corners are not included in the selection, hold down the Shift key and click the Magic Wand again in the missed area.

Select>Modify>Expand – set to 2px, click OK

Now make the fabric 2 layer active

Ctrl+J to copy the selection – name this layer so that you recognize it easily. I used the letter and 'Main', so: D Main

You now need to complete this step for each of the letters of your text – only the main parts, not the patches.

When you have completed all the letters, turn off the visibility of the fabric 2 layer and you should have the main parts of all letters in black and the patches and background showing red.

Step 5

Double click on the first main letter layer to bring up the blending options. Apply the following Color Overlay, Bevel and Emboss and Contour settings:

Right click on this main letter layer and click on Copy Layer Style

Make the second main letter layer active, hold down the Shift key and click on the last main letter layer to select all the main letter layers.

Right click on any highlighted layer and click on Paste Layer Style

Now make the first main letter layer active, hold down the Shift key and click on the last main letter layer to select them all.

Ctrl+G to group all the main letter layers. Rename the group Main Letters

Step 6

Before starting on this step, it is advisable to move the fabric 2 layer below the fabric 1.

Now you need to return to Step 4, use the Magic Wand Tool and move back and forth between the text layer and fabric 1 layer, this time selecting the patches.

Don't forget to expand the selection each time and ensure you don't miss any of the corners in the selection.

Name these layers however you will recognise them such as: D Patch.

Step 7

Double click on the first patch layer to bring up the blending options and apply the following Color Overlay, Bevel and Emboss and Contour settings:

As before, right click on this patch layer and click Copy Layer Style

Make the second patch layer active, hold down the Shift key and click on the last patch layer to select them all.

Right click on any highlighted layer and click Paste Layer Style to apply the style to all patch layers.

Make the first patch layer active, hold down the Shift key and click on the last patch layer to select them all.

Ctrl+G to group the layers – name this group Patches

Step 8

Turn off the visibility of all layers and groups except the text layer and the background layer. You should now have the blue text outline on a white background.

You may notice that this font has left some thin lines across the top of the text – you can delete those during this step.

Right click on the text layer and click Rasterize Type

Add a layer mask by clicking the icon at the bottom of the layers palette (grey rectangle with a white circle in the middle).

Select a hard round brush, size approximately 6px.

Zoom very well into the image and with black as the foreground colour, remove all of the text except the stitches.

You should end up with, well, frankly, quite a messy looking image!

Restore visibility to the two groups.

Step 9

Double click on the text layer to bring up the blending options and apply the following Color Overlay and Bevel and Emboss settings:

Using a round brush, hardness set around 60%, size 2px, paint some stitches around the holes of any letters that have them, such as A and P. You can use any colour for the foreground as the blending options will change it automatically.

Step 10

Create a new layer below the text layer.

Select the Brush tool, a round brush size 5px, hardness 60%, foreground colour black.

Zoom into your image and place a one-click circle under each end of each stitch.

Apply the following Bevel and Emboss and Contour settings:

Reduce the layer opacity to 78%.

Step 11

Restore the visibility to fabric 1 layer.

Image>Adjustments>Black and White – from the drop-down list, select Neutral Density.

You can now cut the image or leave it with the dark edge, as you prefer.

Final Result

You can select different colours for different effects. You can also rotate the fabric texture slightly for either the background or the text. Of course, you could also use different fabric textures. This is a very flexible design, a little imagination and creativity could produce some very different end results.

Note: If you think you will not need to make any alterations to the letters you are creating, and to save just a little time, you can select all the fabric letters on one layer and all the patches on one layer, then apply the blending options.