Paterson was born in Glasgow, the son of a wealthy manufacturer who joined the family business until he was able to persuade his father to allow him to study in Paris between 1877 and 1882. He returned to Scotland during the summer months to paint with Robert MacGregor on the east coast, and the two artists became associated with the Glasgow Boys during this time.
In 1884 Paterson returned to Scotland to live in Dumfriesshire where he concentrated on painting the village of Moniaive. In 1888 he established The Scottish Art Review, and became a member of the New English Art Club. He finally settled in Edinburgh in 1905, after having been elected an associate of the Royal Scottish Academy in 1896, later becoming the Secretary.