Hi Thorn,
Basically everything takes place on a texture for the collar sadly we can't nano prim them XD
So far we can work with custom collar kits and cap kits all texture based.
So we need to do that in a graphics program and yes how you ask ...
I don't know if you have Photoshop or an other program but it takes practice, Google, YouTube or (in world) classes I'm afraid
As for applying a collar to a kitty this is indeed done by placing the collar close to the kitty and clicking it.
A confirmation window will ask you if that is indeed the cat you like to apply it on if yes the cat will re-rezz and wears the collar after.
I hope this helps at least a bit.