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                                                                    Exhibit 10.3

                       ELK ASSOCIATES FUNDING CORPORATION

                     Non-Employee Director Stock Option Plan

         This Non-Employee Director Stock Option Plan dated _________, 1998 (the
"Plan") governs options to purchase Common Stock, $0.01 par value (the "Common
Stock"), of Elk Associates Funding Corporation (the "Company") granted on or
after the date hereof by the Company to members of the Board of Directors (the
"Board") of the Company who are not also employees, officers or interested
persons (as defined in Section 2 below) of the Company. The purpose of the Plan
is to attract and retain qualified persons to serve as Directors of the Company
and to encourage ownership of stock of the Company by such Directors so as to
provide additional incentives to promote the success of the Company.

         1. Administration of the Plan.

         Grants of stock options (individually referred to herein as an "Option"
and collectively as "Options") under the Plan shall be automatic as provided in
Section 6 hereof. However, all questions of interpretation with respect to the
Plan and Options granted under it shall be determined by a committee (the
"Committee") consisting of the Directors of the Company who are not eligible to
participate in the Plan, and such determination shall be final and binding upon
all persons having an interest in the Plan.

         2. Persons Eligible to Participate in the Plan.

         Members of the Board who are not also officers or employees of the
Company shall be eligible to participate in the Plan ("Eligible Directors").

         3. Shares Subject to the Plan.

            (a) Number of Shares. The aggregate number of shares of Common Stock
of the Company which may be optioned under this Plan is 75,000 shares. In the
event of a stock dividend, split-up, combination or reclassification of shares,
recapitalization or similar capital change relating to the Common Stock, the
maximum aggregate number and kind of shares or securities of the Company as to
which Options may be granted under this Plan and as to which Options then
outstanding shall be exercisable, and the exercise price of such Options, shall
be appropriately adjusted by the Committee (whose determination shall be
conclusive) so as to preserve the value of the Option.

            (b) Effect of Certain Transactions. In order to preserve an Eligible
Director's rights under an Option in the event of a change in control of the
Company, the Committee in its discretion may, on the Date of Grant (as defined
in Section 6(b) below) or at any time thereafter, take one or more of the
following actions: (i) provide for the acceleration of any time period relating
to the exercise or payment of the Option, (ii) provide for payment to the
Eligible Director of cash or other property with a fair market value equal to
the amount that would have been received upon the exercise or payment of the
Option had the Option been exercised or paid upon the change in control, (iii)
adjust the terms of the Option in a manner determined by the Committee to
reflect the change in control, (iv) cause the Option to be assumed, or new
rights substituted therefor, by another entity, or (v) make such other provision
as the Committee may consider equitable to the Eligible Director and in the best
interest of the Company.


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            (c) Restoration of Shares. If any Option expires or is terminated
unexercised or is forfeited for any reason, the shares subject to such Option,
to the extent of such expiration, termination or forfeiture, shall again be
available for granting pursuant to Options under the Plan.

            (d) Reservation of Shares. The Company shall at all times while the
Plan is in force reserve such number of shares of Common Stock as will be
sufficient to satisfy the requirements of the Plan. Shares issued under the Plan
may consist in whole or in part of authorized but unissued shares or treasury
shares.

         4. Types of Options.

         All Options granted under this Plan shall be non-statutory options not
entitled to special tax treatment under Section 422 of the Internal Revenue Code
of 1986, as amended.

         5. Form of Options.

         Options granted hereunder shall be evidenced by a writing delivered to
the optionee specifying the terms and conditions thereof and containing such
other terms and conditions not inconsistent with the provisions of the Plan as
the Committee considers necessary or advisable to achieve the purposes of the
Plan or comply with applicable tax and regulatory laws and accounting
principles.

         6. Grant of Options and Option Terms.

            (a) Initial Grant of Options. On the later of (i) date of the
approval of the Plan (the "Approval Date") by the Securities and Exchange
Commission in accordance with the 1940 Act, or (ii) the first anniversary of the
election or appointment of such Director to the Board (the "First Anniversary
Date"), providing such Director is then serving, each of the following Directors
shall automatically be granted Options to purchase the number of shares of
Common Stock determined by dividing $50,000 by the Current Market Value (as
defined in Section 6(c) below) on the date indicated opposite each Director's
name (the "Initial Grants") provided each such Director is serving on the
Company's Board as an Eligible Director on the Approval Date or the First
Anniversary Date, as the case may be:

                  Name of Director                  Automatic Grant Date
                  ----------------                  --------------------
                  Paul Creditor
                  Approval Date
                  John Acierno
                  Approval Date
                  Alan Kaplan
                  Approval Date
                  Marvin Sabesan                    Approval Date

            (b) Automatic Grant of Options. At each annual meeting of the
stockholders of the Company after the Approval Date, each new Eligible Director
elected at such meeting shall automatically be granted on such new Eligible
Director's First Anniversary Date of such election an Option to purchase the
number of shares of Common Stock determined by dividing $50,000 by the Current
Market Value of the Common Stock on such First Anniversary Date of such
election. In addition, upon the election of an Eligible Director other than at
an annual meeting of stockholders (whether by the Board or the stockholders and
whether to fill a vacancy or otherwise), each such Eligible Director shall
automatically be granted an Option


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on the First Anniversary Date of the election of an Eligible Director other than
at an annual meeting of stockholders to purchase that number of shares that is
determined by dividing $50,000 by the Current Market Value of the Common Stock
on the First Anniversary Date of such election. After the Initial Grants have
been made, all subsequent grants of Options to Eligible Directors upon the First
Anniversary Date of their election to the Board shall be referred to as
"Automatic Grants." The "Date of Grant" for the Initial Grants shall be the
Approval Date and the Date of Grant for the Automatic Grants shall be the First
Anniversary Date of the election as a new Eligible Director, whether at an
annual meeting or otherwise, as the case may be. No Options shall be granted
hereunder after ten years from the date on which this Plan was initially
approved and adopted by the Board.

            (c) Exercise Price. The price at which shares may from time to time
be optioned shall be determined by the Committee, provided that such price shall
not be less than the current market value (the "Current Market Value") of the
Common Stock on the date of grant, or if no such market value exists, then the
current net asset value of the Common Stock of the Company or such other lawful
consideration as the Committee may determine.

            (d) Term of Option. The term of each Option granted under this Plan
shall be five years from the Date of Grant.

            (e) Period of Exercise. Options granted under this Plan shall become
exercisable commencing 12 months after the Date of Grant. Directors holding
exercisable Options under this Plan who cease to be Eligible Directors for any
reason, other than death, may exercise the rights they had under such Options at
the time they ceased to be an Eligible Director; provided, however, no
additional Options held by such Directors shall be exercisable thereafter. Upon
the death of a Director, those entitled to do so under the Director's will or
the laws of descent and distribution shall have the right, at any time within
twelve months after the date of death, to exercise in whole or in part any
rights that were available to the Director at the time of his or her death.
Options granted under the Plan shall terminate, and no rights thereunder may be
exercised, after the expiration of five years from their Date of Grant.

            (f) Method of Exercise and Payment. Options may be exercised only by
written notice of the Company at its executive offices accompanied by payment of
the full exercise price for the shares of Common Stock as to which they are
exercised. The exercise price shall be paid in cash or by check or by the
surrender of unrestricted shares of Common Stock or by any combination of the
foregoing. Upon receipt of such notice and payment, the Company shall promptly
issue and deliver to the optionee (or other person entitled to exercise the
Option) a certificate or certificates for the number of shares as to which the
exercise is made.

            (g) Non-transferability. Options granted under this Plan shall not
be transferable by the holder thereof otherwise than by will or the laws of
descent and distribution, and shall be exercisable, during the holder's
lifetime, only by him or her.

            (h) Withholding. The optionee shall pay to the Company, or make
provisions satisfactory to the Company for payment of, any taxes required by law
to be withheld in respect of any Options under the Plan no later than the date
of the event creating the tax liability. The Company and any parent corporation
or subsidiary corporation of the Company (as defined in Sections 424(e) and (f),
respectively, of the Code) may, to the extent permitted by law, deduct any such
tax obligations from any payment of any kind otherwise due to the optionee.


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         7. Limitation of Rights.

            (a) No Right to Continue as a Director. Neither the Plan nor the
granting of an Option or any other action taken pursuant to the Plan, shall
constitute an agreement or understanding, express or implied that the Company
will retain an optionee as a Director for any period of time or at any
particular rate of compensation.

            (b) No Stockholders' Rights for Options. No Director shall have any
rights as a stockholder with respect to the shares covered by his or her Option
until the date he or she exercises such Option and pays the Option price to the
Company, and no adjustment will be made for dividends or other rights for which
the record date is prior to the date such Option is exercised and paid for.

         8. Amendment or Termination.

         The Board may amend, suspend or terminate the Plan or any portion
thereof at any time, subject to any stockholder approval that the Board
determines to be necessary or advisable, provided that the Participant's consent
will be required for any amendment, suspension or termination that would
adversely affect the rights of the Participant under any outstanding Options.

         9. No Fractional Shares. All grants of Options shall be rounded to the
nearest whole share and no Options representing fractional shares shall be
issued.

         10. Governing Law. The provisions of the Plan shall be governed by and
interpreted in accordance with the laws of the State of New York.

         This Plan was approved by the Board of Directors on August 21, 1998.
This Plan was approved by the Stockholders on September 28, 1998. This Plan was
approved by the Securities and Exchange Commission on August 31, 1999.


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