Could I do the setup on a USB 2.0 external HDD and then clone it to the internal drive?
That would work, but it would be painfully slow. You would likely be better off doing a normal install. If you want to do a clean install starting from a blank disk you should create a Microsoft.com account and add your “device” to it which will create a digital license which you can use on the same machine even if it is an OEM license. It is always better to buy a cheap new SSD and install it in your machine that rather than erase everything on the current drive. The problem if you have old hardware is that you cannot do an upgrade from your current system without doing a clean install. Apparently with new ISOs using the normal procedure using Microsoft's tool for creating your media sometimes even that will not work.