I like the idea of Scotch Guard. Also, be sure you are using polyester threads and not rayons. Polyester is colorfast meaning it won't run/bleed into other fibers and bleach resistant---or so the claims say.
When I worry about that I use Fray Check on the lettering. Not sure if it really helps just makes me feel a bit more secure. Hugs. Nan W
Here are two links to tutorials for making garden flags and neither mention anything about adding any type of protection to the lettering. I might suggest that if you want you could spray it with some Scotch Guard as a water deterrent if you wanted. But don't think you need do anything.
I really do not know and I wonder if decoupage would work. Maybe others have a idea. I guess time will tell.