Hi Fen,
My answer is repeated; IMO you don't need to format 1st; I have like 10 external drives, and I didn't have to format them to save Macrium backup image files on any of them. The Macrium restore works about 99% of the time, unless there is a hardware problem on the machine you are restoring to such as a failing/failed hdd, RAM stick error (memory Leak), or a faulty Mobo.
Answer to your 2nd question, is also yes, you can use your smaller hdd for the Macrium backup image, as long as you check the capacity of your backup image prior to saving it on that drive. Macrium lets you do this dynamically within the last summary action screen before you hit the
FINISH button to kick off the backup process! If your backup image is show say at 80GB and your HDD has 118GB free, you are good to go. If however, you backup image in the summary screen shows 190GB and you only have 118GB free; it won't work obviously as the target backup image file is too big for the amount of free space on your HDD! Pretty simple really.
Pat makes some excellent points however. I don't do it the way he does, but when you format an existing or brand-new external USB HDD, if the drive itself is failing or is faulty, often that format operation will fail and produce some kind of an error message. At this point, in Pat's paradigm, he would probably either test the drive with more advanced diagnostic tools and see if it's failed, and if so, replace it with a new drive, or simply use a different drive that will complete a format without error. If so, he simply wouldn't use that HDD to store critical backup image files in the first place!! (Good idea, right?). I test
ANY external HDD I plan to use for this purpose with diagnostic tools
BEFORE I start storing backup image files on it; such as
WD DRIVE UTILITIES, on
WD drives, which most of my external HDDs are. This way, I can avoid the whole formatting step, as I know the drives are good to use before I start storing stuff on them.

I'm taking the time to explain this, as you can do it either way, and Pat's method certainly has merit and works for him.

My method works too, at least for me and most of my Students who I've training to be Repair Techs or Repair Engineers.
Hope that helps you! Go Patriots!
<<<<BBJ>>>>