Anybody hoping to make flags might find this useful; https://www.dropbox.com/s/bt7zfx7f7wvat ... exture.psd
You'll need a decent image editor to open .psd files. Paint.NET, GIMP, or Photoshop are all grand.
Replace the bottom layer with your flag (128x128). Ensure that any central pattern/device fits within the shield. Delete the shield layer. Then play around with the brightness/contrast values of the fabric layer until it looks right. I'd also suggest fiddling with the brightness/contrast values of your flag if it's particularly dark, as the fabric texture doesn't show through on darker images.
Hope that helps.