You can use external drives, but that caps your loading time improvements unless you have a pretty fast USB 3 external drive right? I am starting to load some games from external drives on my XSX and PS5, but I am choosing games with already low loading times and/or small games likely to fit in memory as is.
For PS4 games I compared external with internal and I couldn't spot a difference to be honest. The PS5 downclocks to PS4 speeds anyway. Its a Samsung T7 mind you, a fast external drive to begin with.
I'd advise to put all PS4 content on a T7. It saves a ton of internal space.