There are several reasons why businesses prefer to trade with entities that are VAT registered. The most businesses which are not registered tend to be sole trader entities and thus do not have the perceived status of limited companies.
The risk to businesses of engaging in transactions which ultimately result in bad debts might be thought as being greater which non VAT registered sole traders than with incorporated legal entities.
The mechanisms which govern VAT registered businesses requiring most to account for their input and output tax on a quarterly basis often encourages more stringent accounting practices.
In an attempt to minimise the VAT a business has to pay HM Revenue and Customs at the end of each quarter a business may seek to maximise the levels of input VAT it can claim.
As most smaller businesses will typically opt for the VAT cash accounting scheme the offset of input VAT can only take place upon the settlement of purchase invoices.
These forces may inadvertently result in creditors being paid for goods and services they have provided the business so that the resultant input VAT can be reclaimed by the payer.
This apparatus do not of course guarantee that conducting business with a VAT registered business will make the most ardent bad payers part with their funds within the terms of a sale.
It might however provide some comfort in an initial and on-going assessment for the likelihood of a business received the agreed remuneration for the goods and services it has provided.