we (my daughter and I) make a lot of our own (she's 6)

I get my patches at shows
or you can buy them online... Ebay should have them for hella cheap. 

or you can make them... I don't use cardboard for my stencils but instead i use poster board (or bristle board) cause cutting through cardboard sucks and dulls the shit out of my exacto knife. 

eh, supplies (found at craft or art supply stores):

your stencil printed out (or drawn) on paper
exacto knife
extra blades (I use #11)

self-healing cutting mat ( or like a thick ass piece of cardboard so you don't cut up the desk/table you are working on)

fabric paint (I use tulip fabric paint matte finish they also have a softer paint which i'll try to get my hands on if i see it)
glue (i like spray adhesive but anything works as long as it sticks paper to paper)
Fabric of choice (most common is canvas or twill because its durable but really you can use anything. 
paintbrush (optional)
pencil (optional)

Instructions:
paste stencil drawing to poster board. 
now cut the stencil out through the poster board. (this is where your exact blade and healing mat/cardboard comes in)
place stencil on fabric of choice. 
apply fabric paint over stencil. or if you are meticulous as fuck like i am, you will trace it out with a contrasting colored pencil and paint the fabric on there. 



if you are REALLY FUCKING METICULOUS, you can just copy the picture straight onto your patch with a contrasting colored pencil and add fabric paint. 

to help copy you need to print out your image, and draw a grid over it. then draw a grid on your fabric and copy the image. 

Grid Drawing - Copying Pictures Using a Grid Squares

You can also screen print them: 

How-to Screenprint, Threadbanger