I've never used this type of fabric, so can't answer the bleeding question. However, regarding how to prewash 5" squares: wash by hand (I usually use a large deep bowl to hold the water) with whatever detergent you use to wash your larger fabric, rinse well, squeeze gently to remove water (or salad spin), then hand straighten - do not stretch or pull squares, put squares on absorbent towels (paper or terry), let air dry, then starch and iron. You shouldn't get too much, if any, fraying this way.
Good luck!